Monday, 21 Jun 2010

European Downgrade Puts Halt to Recent Gains

The U.S. dollar fell Monday against the Australian and New Zealand dollars, as currencies closely tied to global growth gained on China's weekend decision to allow greater flexibility in the yuan's exchange rate, but a ratings-agency downgrade of a major European bank cast a shadow on investor sentiment.

Fitch Ratings' downgrade of French banking giant BNP Paribas threatened to send the euro below $1.23 after the common currency had earlier rallied to near $1.25 on the back of the China news, which caused a broad rush into riskier assets.

Despite the late-afternoon pullback in the commodity-backed dollar bloc of currencies, Asian emerging-market currencies held onto strong gains against the greenback, with the Australian dollar up about 0.7% against the greenback, and the New Zealand dollar strengthened by about 0.35%.

The euro and yen, on the other hand, gave up the knee-jerk gains they had enjoyed on the back of the China decision, as investors turned away from a general bid higher in risky assets and took a second look at which currencies will most benefit from a higher yuan.