Dollar Gains as China Says ‘Not Aware’ of Reserve Currency Talk

July 2 -- The dollar rose from a three-week low against the euro and erased losses versus the yen after a Chinese official said he was “not aware” of a plan to discuss a new reserve currency at a Group of Eight meeting next week.

The greenback also gained versus 13 of the 16 major currencies after Chinese Vice Foreign Minister He Yafei said he hopes the dollar will “remain stable,” easing concern it will lose its reserve status. The yen rose from near a two-week low against the euro on speculation a U.S. report today will show the world’s biggest economy lost jobs for an 18th month, spurring demand for the relative safety of Japan’s currency.

“The minister’s remarks are definitely supportive of the dollar,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “It’s extremely difficult to move to a new reserve currency. For China, the value of their U.S. holdings would drop.”

The dollar climbed to $1.4109 per euro as of 1:25 p.m. in Tokyo from $1.4142 in New York yesterday, when it declined to $1.4201, the lowest since June 5. The dollar was at 96.60 yen from 96.65 yen. The yen advanced to 136.31 per euro from 136.70 yesterday, when it fell to 136.89, the weakest since June 15.

The U.S. currency dropped beyond $1.42 versus the euro yesterday after Reuters, citing G-8 sources, reported that China asked to debate proposals for a new global reserve currency at next week’s summit in Italy.

Chinese officials have sought a greater role over time for the International Monetary Fund’s unit of account, known as Special Drawing Rights, or SDRs, in an effort to reduce the dollar’s dominance.

Dollar Index

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, rose 0.2 percent to 79.794.

The yen strengthened versus all of the 16 major currencies as today’s U.S. employment report may show the jobless rate increased to the highest level since 1983, suggesting the global recession will be prolonged.

U.S. employers cut 365,000 jobs last month after reducing them by 345,000 in May, according to a Bloomberg News survey of economists before the Labor Department report. The unemployment rate climbed to 9.6 percent, a separate Bloomberg survey showed.

“I will certainly expect the yen to strengthen if the payroll data comes in worse than expected because of risk- appetite flow,” said Katie Dean, a senior economist in Melbourne at Australia & New Zealand Banking Group Ltd., Australia’s fourth-biggest lender.

U.S. Jobs

The U.S. lost more jobs than forecast last month, an industry report showed yesterday. The 473,000 drop in the ADP Employer Services gauge in June was higher than the forecast of 394,000 in a Bloomberg survey of economists, and it followed a revised reduction of 485,000 workers in May.

The Japanese currency typically strengthens in times of financial turmoil as the nation’s trade surplus makes the currency attractive because the nation does not rely on overseas lenders.

Gains in the yen may be tempered after a government report today showed Japanese investors purchased the most overseas debt in four years.

Japanese investors bought 1.53 trillion yen ($15.9 billion) more foreign bonds than they sold in the week ended June 27, the most since the period ended June 24, 2005, the Finance Ministry said in a report.

“Investors, especially individuals, are increasing their purchases of higher-yielding bonds,” said Yoshisada Ishide, who oversees $2.4 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. “They feel more reassured about investing abroad. This trend is likely to persist in the third quarter. The bias is for yen weakness.”

Japan’s benchmark interest rate of 0.1 percent compares with 3 percent in Australia and 2.5 percent in New Zealand, making the South Pacific nations’ assets attractive to investors seeking higher returns.