Dollar supported by firm stocks in Asian trade

TOKYO (AFP) - The dollar was steady in Asian trade Thursday, supported by rebounding global share prices while the market reacted cautiously to a report that China might dump its US currency holdings, dealers said.

The dollar was at 119.73 yen in Tokyo morning trade, unchanged from levels in New York late Wednesday.

The euro was firmer at 1.3803 dollars after 1.3796 and at 165.22 yen from 165.17.

The dollar was supported by the continuing rally on global stock markets and on signs of an easing of recent turmoil in US credit markets, said Masaki Fukui, senior economist in the forex division of Mizuho Corporate Bank.

"The market has calmed down momentarily, with traders adjusting their positions," he added.

Fukui said the market was weighing a British newspaper report claiming that China's government may "liquidate" its large holdings of US assets if Washington imposes threatened trade sanctions on Beijing for its management of the yuan.

Britain's Daily Telegraph newspaper reported that Chinese Communist Party officials had hinted Beijing may use its 1.33 trillion dollars of foreign reserves "as a political weapon" to deter the US Congress from taking action.

President George W. Bush said China would be "foolhardy" to attempt such a move while US Treasury Secretary Henry Paulson said the report was "absurd."

Fukui said that at the moment the market did not expect China to liquidate its large holdings of US assets.

"Although if it did, it would have a very large impact on markets," he added.

Investors have regained some of their appetite for risk since the US Federal Reserve indicated on Tuesday that it did not see the recent turbulence in credit markets as a significant threat to economic growth, dealers said.

Steadier global markets encouraged speculators to engage once again in carry trades that involve borrowing in countries with low interest rates to buy higher yielding currencies, they said.

That weighed on the yen and supported the Australian and New Zealand dollars.

The British pound was relatively steady, changing hands at 2.0363 dollars from 2.0371 in New York, after gaining ground in London on speculation of a further rise in interest rates by the Bank of England in the coming months.

But Commonwealth Bank of Australia economist Joseph Capurso argued that recent turmoil in credit markets had slightly reduced the chances that the Bank of England will raise interest rates again in the near future.

"Recent developments in markets, the tightening in credit standards and the associated lift in uncertainty mean that another rate hike from the Band of England is less of a 'done deal' than those it has flagged and delivered over the past year," Capurso said.