By Keith Jenkins and Yasuhiko Seki June 21 (Bloomberg) -- The dollar traded near a four-week low against the euro after China signaled an end to the yuan’s fixed rate to the greenback, boosting confidence in the global economic recovery. The U.S. currency weakened against 14 of its 16 most actively traded peers. The Australian and New Zealand dollars reached one-month highs after China said it may let the yuan strengthen, boosting demand for nations that sell products to the world’s third-largest economy. The People’s Bank of China two days ago indicated it’s abandoning the 6.83 yuan peg to the dollar adopted to protect exporters during the financial crisis. “The dollar has weakened across the board as the market takes the Chinese announcement as a supportive development for global growth,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It’s an indication that they’re more confident in the recovery in both China and in the global economy. Other commodity currencies, such as the Australian and New Zealand dollars, benefit from the boost in risk sentiment,” he said. The dollar fell to $1.2396 per euro at 10:27 a.m. in London from $1.2388 last week in New York, after reaching $1.2487, the weakest level since May 24. Australia’s dollar rose 1.4 percent to 88.41 U.S. cents, after touching 88.59 cents, the most since May 17. New Zealand’s dollar climbed 1 percent to 71.40 cents after touching 71.53 cents, the strongest since May 14. The yen was at 91.33 per dollar from 90.71. The pound gained 0.4 percent to $1.4887 after reaching $1.4937, the highest since May 12. The Chinese central bank made its announcement at 7 p.m. Beijing time on June 19 in a posting on its website, a week before leaders from the Group of 20 meet in Toronto. PBOC Announcement U.S. President Barack Obama called China’s decision a “constructive step.” Other lawmakers in the world’s largest economy said China’s move was insufficient. The Chinese central bank said in a follow-up statement that a more flexible currency will “direct resources to domestic- demand driven sectors such as services” and help curb an excessive reliance on exports, signaling it anticipates the currency will rise. Authorities will resume a managed float of the yuan against a basket of currencies, according to the June 19 statement. Before the exchange rate was frozen in July 2008, Premier Wen Jiabao’s government had allowed a 21 percent advance versus the dollar over three years. Analysts at banks from Goldman Sachs Group Inc. to Royal Bank of Scotland Group Plc predicted gains in the yuan in the coming year will be held to less than 6 percent. The median of 14 forecasts in a Bloomberg News survey indicates an advance to 6.7 by Dec. 31. ‘React Positively’ “Financial markets are likely to react positively to China’s decision to de-peg,” said Gareth Berry, a currency strategist in Singapore at UBS AG, the world’s second-largest foreign-exchange trader. “The currencies of those economies with the largest share of exports to China, which are Australia, Japan, Taiwan, Korea, Brazil and Indonesia, will likely rally.” Other currencies that do well when investors become more willing to take risks, such as the Canadian and New Zealand dollars, Nordic currencies and those from emerging markets, will also likely benefit, according to Berry. “It is unlikely that China’s announcement presages aggressive action on the yuan,” Mitul Kotecha, the Hong Kong- based head of global foreign-exchange strategy at Credit Agricole Corporate & Investment Bank, wrote in an e-mailed report today. “Stability appears to be the name of the game. China will likely allow some, albeit gradual appreciation.” Managed Float China’s central bank yesterday reaffirmed it would maintain the yuan’s 0.5 percent daily trading band and said greater flexibility would help cut the trade surplus and reduce the reliance on exports as a driver of growth. The yuan has been held at about 6.83 to the dollar since mid-2008. Its peg was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the yen. The yuan rose 0.44 percent to 6.796 per dollar today, the sharpest gain since Oct. 2008. The dollar may strengthen against non-Asian currencies, Morgan Stanley said in a research note dated yesterday. “The initial implication for the foreign-exchange market would be for the dollar to trade stronger against non-Asian currencies, especially versus those that benefit from reserve diversification such as the euro,” analysts led by Stephen Hull, London-based global head of currency strategy, wrote in the note. The central bank’s decision suggests less demand for euros as accumulation of reserves slows, the analysts wrote. Euro Sentiment “China’s move is likely to weigh on euro sentiment, as markets price the likely reserve reduction by China, even before we see physical reduction in reserves themselves,” they wrote. Stock markets rallied as renewed risk sentiment damped demand for the relative safety of the greenback. The MSCI World Index of shares advanced 0.8 percent, extending its run of gains to ten days, the longest since July. Futures traders decreased their bets to the least in two months that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 62,360 on June 15, the narrowest since April 16, and compared with net shorts of 111,945 a week earlier. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

Source