MW: Dollar slides; China repeats call for new reserve currency
LONDON (MarketWatch) -- The dollar was under renewed pressure Friday after China's central bank reiterated a veiled call to lessen the U.S. unit's role as the world's reserve currency.
News reports said the People's Bank of China's annual financial stability report repeated an earlier call by central bank chief Zhou Xiaochuan for the development of a new super-sovereign currency that would largely take the place of the dollar.
The euro extended gains versus the dollar following the reports to trade at $1.4083 in recent action, up from $1.3988 in North American trade late Thursday and from $1.4048 in late Asian trade Friday morning.
The dollar slipped to 95.54 Japanese yen, down from 95.85 yen late Thursday.
The dollar index (DXY 79.78, -0.62, -0.77%) , a measure of the greenback against a trade-weighted basket of currencies, traded at 79.894, down from 80.394 late Thursday.
The Chinese central bank's comments come after Chinese government officials recently played down concerns over the dollar's reserve-currency role following a visit to China by U.S. Treasury Secretary Timothy Geithner earlier this month.
"There may be signs here of tensions mounting between the PBOC's economic concerns over China's holdings of dollars and the Chinese government's diplomatic reasons" for toning down their criticism, said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
The central bank is "still clearly worried about the longer-term opportunity cost of holding dollars -- in as much as it can cite the dollar's role in the global economy as one of the main reasons for the financial crisis -- while the Chinese government is still more happy to play to the tune of the Bernanke-Geithner camp which sees leaning against the wind in order to protect the U.S. dollar as a necessary evil," he said.
The British pound (CUR_GBPUSD 1.65, +0.01, +0.59%) rose to $1.6496, compared with $1.6376 late Thursday.
The Bank of England, in its semi-annual financial stability review, said the nation's banking sector was on firmer ground than seen six months ago, but warned that the financial system remained vulnerable to shocks. See full story.
On the data front, Japan's core consumer price index fell 1.1% in May from the same month a year earlier, according to government data released Friday, indicating risks that the nation might be slipping back into deflation. See Economic Report on Japan CPI.
The drop was in line with expectations of economists polled by Dow Jones Newswires and Nikkei. The core figure excludes volatile fresh food prices. Core CPI fell 0.1% on year in April.
The Bank of Japan "cannot rest assured and withdraw liquidity so long as consumer price declines persist," said Japan strategist at the Bank of Tokyo-Mitsubishi in a note to clients Friday.
