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RPT-FOREX-U.S. dollar drops vs euro after China news

Published 07/01/2009, 01:29 PM
Updated 07/01/2009, 01:32 PM

(Repeats with no changes, to fix technical problem)

* China news on reserve currency fuels dollar selling

* Euro gets support from stocks, PMIs report

* Markets await U.S. jobs report, ECB meeting on Thursday (Recasts, adds comments, updates prices, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, July 1 (Reuters) - The dollar fell to a three-week low against the euro on Wednesday, pressured by news China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit.

Gains in global stocks as well as improved manufacturing activity data in Europe and China have also hurt demand for the dollar as a safe haven.

But it was the report on China, citing sources, that fueled a steep round of dollar selling, adding to the currency's earlier losses in Asia and London. For the China story, click on [ID:nLAG003567].

"The dollar has been hit in a knee-jerk reaction to the news headlines but we are skeptical of the merits," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York.

"We are struck by the gap between China's declaratory policy -- what they say -- and their operational policy -- what they do."

What China says sounds like they want to end the dollar's role as the top reserve currency, Chandler said, but the world's third largest economy has not backed its rhetoric as it continues to accumulate dollars and Treasuries.

China remains the biggest holder of U.S. Treasuries with about $763.5 billion in holdings. It has $2 trillion in currency reserves and some estimates from analysts suggested that China holds about 65-75 percent of its reserves in U.S. dollars.

In early afternoon trading, the euro was up 0.9 percent on the day at $1.4167, after earlier trading as high as $1.4201 in the wake of the China news, its highest since June 5, according to Reuters data.

The ICE Futures' dollar index <.DXY>, a measure of the greenback's value against a basket of six major currencies, fell 0.8 percent to 79.483.

Earlier in the session, positive data on manufacturing in Europe and China boosted economic optimism around the world. That helped U.S. stocks and commodity currencies such as the Canadian dollar and the Australian dollar.

Markets now await the all-important U.S. non-farm payrolls report on Thursday.

Economists expect the U.S. economy to have shed 363,000 jobs in June after losing 345,000 in May. [ECONUS] Also on Thursday, the European Central Bank holds its policy meeting.

The ECB is expected to leave rates unchanged and give more details on its asset buying program.

(Additional reporting by Vivianne Rodrigues; Editing by Chizu Nomiyama)

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