Dollar bounces back as China calms 'currency war' jitters

[August 13, 2015]  By Jemima Kelly

LONDON (Reuters) - The dollar recovered from a one-month low against the euro on Thursday as the yuan's decline slowed, easing worries that China's decision to devalue its currency was a deliberate attempt to gain a competitive advantage.

The biggest move among major currencies came in Europe on Thursday: a 1.6 percent rise in the Swedish crown to a nine-day high of 9.4570 crowns per the euro, after Sweden reported better-than-expected inflation data. That left the crown on track for its biggest one-day gain in three years.

After a volatile couple of days as investors worried the Chinese move heralded a dangerous new chapter in a global currency war, the mood was calmer. China's central bank said there was no basis for further depreciation and it would step in to stabilize prices.

The People's Bank of China said on Tuesday it would now calculate the daily yuan fix by taking more notice of market forces, including the closing price in the previous day's trading session. But coming after a run of weak data, many had believed the move was motivated by desire to boost exporters.

"It's not a currency war if a currency depreciates for fundamental reasons," said Commerzbank currency strategist Esther Reichelt in Frankfurt. "We are seeing a much calmer market today ... now it's understood that it's actually not an intentional steering of the yuan exchange rate, but rather ... a more market-driven move."

The yuan <CNY=CFXS> only weakened by around 0.2 percent on the day. It had tumbled some 3 percent against the dollar since Tuesday in an unprecedented decline.

Investors had been buying back the euro and getting out of carry trades in the yuan and other risky emerging market currencies, driving the euro to a one-month high of $1.12 <EUR=>. On Thursday, they once again sold the single currency on Thursday as risk appetite increased.

The euro fell half a percent on Thursday, hitting a low of $1.1105 after minutes from the European Central Bank's latest rate meeting showed policymakers worried about the impact of Chinese market volatility and an upcoming U.S. rate hike.

That helped the dollar pull away from a one-month low against a basket of major developed economies' currencies. It traded up a third of a percent at 96.582.

The Chinese move had also driven investors to push back their expectations of when the Federal Reserve would raise U.S. interest rates, hurting the dollar. U.S. retail sales data due at 1230 GMT will be closely watched.

"The U.S. clearly needs to watch the global economy and China," said Rabobank currency strategist Jane Foley in London. "But ultimately if we get a very strong release today, market expectations for a September interest rate hike will probably bounce right back."

Against the safe-haven yen, the dollar rose 0.2 percent to 124.48, although it remained below a two-month high of 125.28 yen set on Wednesday.

(Additional reporting by Masayuki Kitano in Singapore; Editing by Larry King)

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