Dollar Slides After China Calls for ‘Super-Sovereign’ Currency

June 26 (Bloomberg) -- The dollar fell, heading for its biggest weekly loss against the euro in a month, after China repeated its call for a “super-sovereign” currency and stocks in Europe and Asia rose.

The dollar extended losses after the People’s Bank of China, or PBOC, said the International Monetary Fund should manage part of members’ foreign-exchange reserves. The Dollar Index, which tracks the greenback against the currencies of six leading trading partners, fell below 80. China is the biggest foreign holder of U.S. Treasuries, with $763.5 billion in April.

“The concern of reserve diversification is always lurking in the background,” said Martin McMahon, a foreign-exchange analyst with Credit Suisse Group AG in Zurich. “The dollar and the yen are looking like the losers and the commodity currencies look like the winners in this environment.”

The dollar declined to $1.4085 per euro as of 6:43 a.m. in New York, from $1.3988 yesterday, extending its loss this week to 1.1 percent. The yen weakened to 134.63 per euro, from 134.22. The U.S. currency fell to 95.57 yen, from 95.95 yen.

“To prevent the deficiencies in the main reserve currency, there’s a need to create a new currency that’s delinked from the economies of the issuers,” the People’s Bank of China said in a review of the economy in 2008 released today.

People’s Bank Governor Zhou Xiaochuan in March urged the IMF to expand the functions of its unit of account and move toward a “super-sovereign reserve currency.” Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar.

‘Signs of Tensions’

China called on the U.S. to guarantee the safety of its assets in March, when Premier Wen Jiabao said the nation was “worried” about its holdings of Treasuries.

“There may be signs here of tensions mounting between the PBOC’s economic concerns over China’s holdings of dollars and the Chinese government’s diplomatic reasons for doing so,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, wrote in an e-mail.

Japan’s Nikkei 225 Stock Average rose 0.8 percent, climbing for a third day, and the Dow Jones Stoxx 600 Index of European shares advanced 0.2 percent. The dollar will trade between $1.50 and $1.60 euro in the third quarter, McMahon said.

“Gains in stocks are pumping capital into markets,” said Masaki Fukui, a senior market economist in Tokyo at Mizuho Corporate Bank Ltd., Japan’s second-largest publicly traded lender by assets. “The recent risk aversion strengthened the dollar as a refuge but as risk appetite rebounds, higher- yielding currencies seem to be benefiting.”

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: June 26, 2009 07:16 EDT