Euro appreciates as China indicates more purchases

London, Jan 7: The euro moved higher against the dollar and the yen on Monday, supported by weekend comments from China’s finance minister that the country should consider buying more euros as soon as possible.

Xiang Huaicheng said on Sunday he expected the euro to become as significant as the dollar as a global currency and that the euro will inevitably become some countries’ reserve currency.

"Talk of Asian central banks buying euros was reheated over the weekend. Things are looking pretty good for the euro this year with the smooth introduction of euro notes and coins last week," said Julian Jessop, treasury economist at Standard Chartered.

China has foreign exchange reserves in excess of $200 billion, the world’s second largest total after Japan. By 0840 GMT, the euro was up almost half a per cent on the day at $0.8988, coming within a cent of $0.9066 highs hit last week on relief after the smooth roll out of notes and coins.

Against the yen, it gained a third of a per cent to 117.48 from late New York levels on Friday, with dealers eyeing the next target of a two-year high of 119.71 hit last week.

The dollar sagged to a two-week low against the yen as investors took profits following its swift rally to a three-year high last week. But worries about possible corporate failures before the end of March, when many Japanese companies close their books, still weighed on the yen.

"You never know when you could hit a landmine," said Seiya Nakajima, an economist at trading company Itochu Corp.

"People will only buy the yen if the government decides to clean up bad companies."

German finance minister Hans Eichel, who is in China to promote the euro as an international reserve currency, said on Monday the euro should appreciate against the greenback due to strong economic fundamentals in Europe. Eichel added the European Union could be an engine for global economic growth because of its sound economic fundamentals.

"I think people are too optimistic over the US economy and at the same time too pessimistic about the eurozone economy," Jessop of Standard Chartered said.

"Data from the US are pointing to a weak recovery, which would disappoint the stock markets and the dollar.

In contrast, the euro should gain as the European Central Bank finally has an opportunity to cut rates aggressively with inflation falling sharply." However, dealers in Tokyo were less sanguine, saying the euro’s outlook was marred by Argentina’s economic woes, because some European banks -- notably Spanish ones -- have large exposure to the country.Argentina said on Sunday it was devaluing its peso by nearly 30 per cent to 1.40 to the dollar, abandoning its decade-old one-to-one peg to the US currency. It said it would start renegotiating with foreign creditors early next month.

The yen showed little immediate reaction to comments by Takashi Imai, chairman of Japan’s most powerful business lobby, Keidanren, that the yen’s current weakness was positive for the Japanese economy because it would give a boost to exports.

The yen has been on a steep downtrend since mid-November as Japanese authorities have said a weaker currency was justified by economic fundamentals.

But some traders expect the ministry to tone down its rhetoric because some Asian nations whose exports compete with Japan’s have sounded the alarm over the yen’s fall.

Both South Korea and China have voiced concern about it, and Japanese prime minister Junichiro Koizumi is seen as keen not to let the issue overshadow his visit to five southeast Asian nations beginning this week.

— Reuters