Dollar Falls on Concern Trade Tensions With China Will Escalate

April 10 (Bloomberg) -- The dollar fell on speculation China will retaliate after the U.S. government said it plans to file copyright piracy complaints to the World Trade Organization.
The U.S. currency snapped three days of gains against the yen and two versus the euro on concern trade friction between the two nations will escalate, slowing economic growth in both countries. Heightened tension also may prompt China to reduce purchases of U.S. assets with its more than $1 trillion of foreign ex change reserves.
``The protectionist attitude of the U.S. is a downside risk for global growth and will hurt the dollar,'' said George Kapasakis a senior foreign-exchange trader at Mizuho Corporate Bank Ltd. in Sydney.
The dollar declined to 118.86 yen at 11:25 a.m. in Tokyo from 119.32 late in New York yesterday. It also dropped to $1.3409 per euro from $1.3354. Dollar will drop to $1.36 in a month, said Kapasakis.
Tension between the U.S. and China is growing after Trade Representative Susan Schwab said complaints will be filed today at the WTO aimed at stopping what the U.S. said is piracy of copyrighted movies, music, software and books. The U.S. trade deficit widened to $763.6 billion in 2006, a fifth record year, on American purchases of Chinese goods.
``The U.S. seems to be adopting protectionism,'' said Masashi Kurabe, currency manager at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. ``It's a negative for the dollar,'' which will drop to $1.3400 per euro and 118.70 yen today, he said.
Losses Accelerated
Losses in the dollar accelerated after the euro rose above $1.3370 and the yen gained beyond 119.00, triggering pre-set orders to buy both currencies, said Lee Wai Tuck, currency strategist at Forecast Singapore Ltd. Investors often place automatic instructions in case bets go wrong.
Traders also sold the dollar after the currency failed to break through a key level of 119.40 yen for a third day, said Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate Bank Ltd. in Tokyo.
``Traders recognized there is a heavy cap on the top of the dollar-yen,'' said Fukui, who expects the dollar to move between 118 and 120.50 yen this week.
Neutral Stance
The dollar also weakened on speculation minutes from a March Federal Reserve meeting and speeches by central bankers will signal the U.S. economy is falling into stagflation, a state where growth slows and prices rise.
The currency dropped 0.5 percent versus the euro on March 21, when the Fed left interest rates at 5.25 percent and deleted a reference to ``additional firming'' in a statement. The Fed also said housing was moderating and prices were elevated. The minutes of that meeting are due tomorrow.
Over the next two days, Fed Chairman Ben S. Bernanke, Governor Frederic Mishkin and regional Fed presidents Richard Fisher, Charles Plosser, Jeffrey Lacker and Michael Moskow are all scheduled to give speeches. Fisher, Plosser and Lacker are non-voting members.
``Inflation expectations remain high, while the economy is slowing, so it's difficult to be optimistic about the dollar,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities. ``The Fed has just moved to a neutral stance, so we can't expect policy makers to make hawkish remarks.''
The dollar may fall to 118.70 yen and $1.34 versus the euro this week, Fukaya said.
Merger Flows
The dollar also fell against the euro and the yen as merger activity pushed it lower versus the Australian dollar, which rose to a 17-year high of 82.32 U.S. cents.
Rinker Group Ltd., Australia's biggest building materials maker, recommended investors accept a takeover offer by Cemex SA after the Mexican company increased its bid by 22 percent. The deal values Rinker at A$17.4 billion ($14.2 billion).
Demand for the Australian dollar also may be stoked by potential international takeovers of Australian companies including Qantas Airways Ltd. and Coles Group Ltd.
``The M&A stories coming out of Australia are pushing the Aussie higher versus the U.S. dollar,'' said Koichi Yoshikawa, head of currency trading at BNP Paribas in Tokyo. ``These flows are weighing on the U.S. dollar versus other currencies.''