WORLD FOREX: China Helps Dlr; Risk Hits Euro, Data Hit Pound

   By Nicholas Hastings
  Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--Reassurances from China about its reserve policy left the dollar higher but the euro has been hit in Europe Monday by a fresh rise in risk aversion.

Market sentiment is being overshadowed by a series of key data and events this week that is encouraging investors to pull back from taking risks.

The issue of foreign exchange diversification out of the dollar remained at the top of market agenda when China once again called Friday for a reserve currency like the SDR's issued by the International Monetary Fund.

However, Bank of China Governor Zhou Xiaochuan calmed down any speculation by saying Sunday that "our foreign exchange reserve policy is always quite stable."

This helped to boost the dollar which had ended last week on a weak note as investors feared a major shift by central banks.

The dollar was also being helped by a rise in risk aversion as currency players take fright at the myriad risks posed by key economic data and events this week.

At the top of this list is the release of June U.S. non-farm payrolls, which are expected to show a decline similar to the 345,000 fall registered in May. If so, this might give the impression that the worst of the economic contraction is over but that the labor market remains weak.

But, as currency strategists at The Royal Bank of Scotland point out, the week is also littered with other market risks -the approach of end-quarter, Japan's latest Tankan survey, China's latest PMI, the start of the earnings season and a European Central Bank meeting.

All this, the RBS strategists said, has the "nervous Nellys" cutting out and the central banks only too happy to see range trading continue.

See chart at

http://www.dowjoneswebservices.com/chart/view/2320

The reduced appetite for risk was apparent in the decline in equities, with the Dow Jones Industrial Average falling 0.4% on Friday, followed by a 1.0% fall in the Nikkei Monday. However, European markets were starting in positive territory with gains of as much as 0.7%.

By 0911 GMT, the dollar had risen to Y95.46 from Y95.20 late on Friday in New York, according to EBS. The euro was virtually flatat Y133.98 fromY133.98, with the yen finding some support from Japanese industrial production data that showed a 5.9% rise in May, the same as in April. Some analysts said this suggests that Japan could still be one of the first major economies to return to growth.

The euro is also down at $1.4021 from $1.4070.

The dollar is up at CHF1.0892 from CHF1.0819 while the pound has fallen to $1.6505 from $1.6523 after the Bank of England's latest household borrowing figures suggest that the recovery in housing market activity has stalled. The number of approvals for new house purchases was unchanged in May from April at 43,000.

Vicky Redwood, U.K. economist with Capital Economics, said this is "consistent with house prices falling at double-digit annual rates."

In Eastern Europe, the euro was down at HUF276.64 from HUF276.86. But, it is also up at PLN4.5103 from PLN4.5046 and at CZK26.038 from CZK25.998.

-By Nicholas Hastings, Dow Jones Newswires; 44 20 7842 9493; nick.hastings@dowjones.com

TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkBackEurope@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.