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China Talk Resurfaces In Euro Market

By KATIE MARTIN
Of DOW JONES NEWSWIRES


LONDON -- Speculation that China may be buying euros to indirectly hold down the yuan is once again circulating around the currency markets as observers struggle to explain a burst higher in the single currency Thursday.

The euro surged against the dollar mid-way through European trading hours, and most analysts attributed the move to a successful auction of Spanish government debt. A number of pre-existing orders to buy, clustered just above $1.30, also appears to have played a role.

Some believe that curious forces could be at play, however. In particular, China is seen as a possible source of euro buying as it seeks to hold down the broad value of the yuan, which has recently hit a series of record highs against the dollar.

"You can never prove it, but maybe this is some Chinese buying," said Lutz Karpowitz, a currencies analyst at Commerzbank.

The People's Bank of China's news department couldn't be reached for comment Thursday.

Amid ever-increasing international pressure on China to allow greater and faster strength in the yuan, the PBOC has allowed the yuan to climb unusually quickly against the dollar of late, with its key dollar-fixing rate dropping to a record low of CNY6.7181 Thursday. That marks an appreciation of around 1% in the yuan over the last eight trading days--a small shift for most major currencies, but a significant move for the tightly controlled yuan.

That kind of currency strength, while modest, poses a risk to China's exports by making the country's products appear more expensive abroad.

A weaker dollar against other major currencies would be a neat way to counteract that pressure, as it dents the yuan's value on a trade-weighted basis. "It's very convenient for Beijing," said Karpowitz. Another investor, who didn't wish to be named, agreed that this explanation "makes sense."

Ideas such as these are common features of the rumor-packed currency markets, and China's involvement is all but impossible to prove or disprove.

Many analysts find this explanation for currency shifts farfetched. Nonetheless, this theory has cropped up a number of times since China dropped its direct dollar peg in June, particularly around intraday currency moves that are tough to explain.

Thursday's jump in the euro arguably fits that description. It has gained sharply this week as investors have turned more pessimistic about the dollar, but the backdrop for the euro itself isn't too great, either, with shaky data on German business sentiment and on euro-zone industrial output in recent days.

Thursday's Spanish government debt auction was smooth and successful, with the treasury selling EUR4 billion of long-dated debt with a lower price tag than many had expected. Still, previous auctions along these lines have tended to move the currency only if they are judged unsuccessful. Positive results rarely boost the euro so strongly.

Meanwhile, China is under sustained pressure by the U.S. to let the yuan, often also called the renminbi, climb much faster than it has done to date.

"A spurt of renminbi appreciation in the last few days may not be enough to dampen growing anger in Washington at how slowly the Chinese currency has moved since the de-facto peg was loosened in June," noted Mark Williams, senior China economist at research firm Capital Economics Thursday.

"Publication of the U.S. Treasury's report on currency manipulation, due in mid October, provides the next potential flashpoint," he added.

At 1245 GMT, the euro was trading at $1.3056 against the dollar. At around 1100 GMT, it hit the day's peak of $1.3110, according to trading system EBS, marking a total climb of almost 0.6% since its rapid short-term ascent began earlier in the session.

---By Katie Martin, Dow Jones Newswires; 44 20 7842 9346; katie.martin@dowjones.com

--(Liu Li in Beijing contributed to this article.)

subway90....did fxnews site go down permanently? Ashraf wanted them to come here..
be careful what you ask for:)

@ subway90 that low left to high right diagonal on your chart in fact extends as far as the June 07 bottom at 1.19 reinforcing it even further. Also on the weekly chart draw a line from the Nov 09 high over the Aug 09 high and this weeks high. Same story from another angle ...

There are no gaps in the FX market. Either your broker closes too early or opens too late - common for most of the MT4 bucketshops. ;)

indeed WSJ said its unlikely, but rumours don't coming by chance...