* Dollar gains, Aussie tumbles as China raises rates
* U.S. Treasury's Geithner comments support dollar
* China move sparks risk aversion; dollar still vulnerable (Updates prices, adds comment, detail, changes byline)
By Wanfeng Zhou
NEW YORK, Oct 19 (Reuters) - The safe-haven dollar rallied broadly on Tuesday, while the euro and commodity-sensitive Australian dollar tumbled after a surprise interest rate increase from China prompted investors to cut risk exposure.
Investors feared a quarter percentage point rise in China's one-year lending rate could dampen Chinese and global growth and slow the country's voracious demand for commodities, many of which come from Australia. [ID:nBJI002412]
"China's rate increase instantaneously pushed people to take risk off the table," said Boris Schlossberg, director of research at GFT Forex. "(China) is trying to clamp down on growth and that's going to reflect badly on Australia, on Germany, on much of the world economy as it readjusts to the idea that Chinese growth may not be as torrid as expected."
The Australian dollar, which last week rose above parity
with its U.S. counterpart for the first time since 1983, was
hit hardest, slipping more than 2 percent to $0.9683
The euro was down 1.5 percent at $1.3735
The euro hit a session low of $1.3720 on EBS, the weakest in two weeks, after U.S. stock losses accelerated. The break of $1.3770 opens the door for a test of $1.37, traders said.
The dollar rose 0.3 percent to 81.49 yen
The U.S. currency also rose 1.6 percent to 1.0340 Canadian
dollars
DOLLAR STILL VULNERABLE
Hobbled by zero interest rates and expectations of more Federal Reserve easing to come, the dollar has been under pressure since September. Analysts, however, say the expectations of Federal Reserve easing have been priced in, providing an opportunity for investors to take profits.
The dollar's rebound began after the euro rose above $1.41 last week, an 8-1/2-month high. It continued on Monday after Treasury Secretary Timothy Geithner said Washington would not devalue the dollar for export advantage. [ID:nLDE69I00W]
Analysts said Geithner's comments may mean the United States was trying to ease global tensions over exchange rates ahead of a G20 meeting in November. Washington wants China to allow more rapid appreciation of the yuan. Beijing and others complain that dollar weakness is stoking inflation by pushing money into their faster-growing economies.
Analysts cautioned, however, that the dollar's rebound may be short-lived given expectations that U.S. interest rates will remain low relative to most other major economies.
"The fundamentals are still pretty well lined up against the dollar. I expect it to come under renewed pressure in the near term," said Daniel Katzive, currency strategist at Credit Suisse in New York.
High-yielding currencies such as the Australian dollar and Brazilian real are likely to attract buyers following their recent retreat, said Societe General strategist Kit Juckes.
He said the market's "gut reaction is to sell commodity block and emerging market currencies" on the China news but added the news was "not a game changer." (Additional reporting by Steven C. Johnson; Editing by Andrew Hay)