Dollar falls on oil price spike, yuan eyed

TOKYO, Aug 29 (Reuters) - The dollar fell half a percent against the Canadian dollar and Swiss franc on Monday as investors fretted that a surge in crude oil prices above $70 a barrel could crimp U.S. economic growth.

U.S. crude futures soared to a new record of $70.80 as Hurricane Katrina strengthened into one of the fiercest storms ever seen in the United States, threatening oil production facilities in the northern Gulf of Mexico.

The Canadian dollar hit nine-month highs against the dollar last week and has benefited from Canada being a major producer of oil. Meanwhile, the Swiss franc has gained on worries that the spike in energy costs will slow the U.S. and global economies.

Traders said a fall Tokyo share prices and a poll showing less support for Prime Minister Junichiro Koizumi's ruling Liberal Democratic Party (LDP) dampened yen sentiment.

The stock market's Nikkei average was down almost 1 percent as the spike in oil prices hurt optimism on the economy's outlook, moving away from a four-year high above 12,500 hit last week.

"Yen buying seems to be stalling after an initial round of optimism about the Sept. 11 election receded," said Tomoko Fujii, a senior currency strategist at Bank of America.

An opinion poll by the daily Asahi Shimbun published on Sunday showed a narrowing of the gap between Japan's main opposition party and the LDP.

Koizumi called the snap election as a referendum on his reform plans, especially privatising the postal system. Polls showing strong public support for Koizumi have encouraged overseas investors to buy Japanese stocks, helping the yen.

By 0350 GMT the dollar was near $1.1925 Canadian dollar, down 0.6 percent from late Friday New York levels and not far from a nine-month low of C$1.1862 struck last Thursday.

The U.S. currency slid close to 1.2535 Swiss francs from 1.2590 francs.

The dollar's broader weakness helped the euro rise 0.3 percent to $1.2320, but it was a tad firmer against the yen around 110.25 yen. The euro gained nearly 0.5 percent to 135.85 yen.

Sounding a cautionary note on the U.S. economy, Federal Reserve Chairman Alan Greenspan said on Saturday that home prices could fall as the housing surge "inevitably" slows. The booming housing market has underpinned U.S. growth in the past few years.

REVALUATION SPECULATION LINGERS

Traders were keeping an eye on the yuan after the dollar briefly fell against the yen on Friday on speculation China would revalue its currency again, following its July 21 move.

Chinese authorities denied another revaluation was coming but said market forces would determine the currency's value.

Talk that China could revalue the yuan again has built up ahead of President Hu Jintao's visit to Washington on Sept. 7.

Chinese central bank governor Zhou Xiaochuan told the Financial Times that recent reforms to the yuan regime do not represent a one-off adjustment. Zhou said a managed floating exchange rate was in place that would allow a move to a market-driven system.

The yuan hit another post-revaluation high of 8.0955 to the dollar on Monday.

Oil may stay as the main focus on Monday with banks in London closed for a holiday and no major economic indicators scheduled to be released except for German data on consumer confidence and July retail sales.

Some traders said speculators may keep to the sidelines ahead of a series of potentially market-moving events in September, starting with the U.S. Institute for Supply Management survey on manufacturing on Thursday.

The busy schedule includes the monthly U.S. employment report on Sept. 2, President Hu's visit and elections in Japan on Sept. 11 and and Germany Sept. 18. (Additional reporting by Satomi Noguchi)

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source: reuters

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