Dollar gains against euro

The euro slid yesterday against the dollar, which benefited from a hike in Chinese interest rates but with investors still more focused on what the US Fed will do to support the US economy.

In London trade, the European single currency eased to $1.3821 from $1.3942 late in New York on Monday.

Against the Japanese currency, the dollar rose to ¥81.75 from ¥81.21 on Monday.

The dollar got a boost by the China’s central bank announcement that it would raise its benchmark one-year lending and deposit rates by 25 basic points each, as Beijing ramps up efforts to contain inflation and soaring property prices.

The first interest rate hike in nearly three years came ahead of key data this week that is expected to show the world’s second-largest economy continued to slow in the third quarter.

Investors reacted to the rate hikes by snapping up dollars, which are considered a safe haven in times of uncertainty, amid fears that tighter monetary conditions will lead to even slower growth in China, said Nick Chamie, Toronto-based head of emerging markets research for Royal Bank of Canada.

“The initial knee-jerk reaction to the China rate hike has been to sell risk – stronger dollar, weaker commodity prices, lower equities,” he told AFP.

But any gains are likely to be small as investors are focused more on the extent of measures the US Federal Reserve will take in an expected second round of quantitative easing to boost the flagging US economic recovery.

“The spectre of QE2 continues to hang over the dollar and without a notable change in expectations in regard to QE2, any recovery for the dollar is likely to be relatively shallow,” said Derek Halpenny of the Bank of Tokyo-Mitsubishi.

The shared eurozone unit had started falling in New York Monday after US Treasury Secretary Timothy Geithner said Washington would not try to push down the greenback for trade advantage.

Currencies look set to be a major topic at the gathering in South Korea on October 22-23 of G20 finance ministers in preparation for a summit by world leaders next month.

The euro also took a dent from a report that German investor confidence fell further in October, with finance experts expecting Europe’s biggest economy to tread water in the coming six months.