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Dollar dumped on worries China may bail on US bonds

The dollar tumbled after a report that China may slow or stop its purchase of US government bonds

The dollar slumped on Wednesday following a report that China may slow or halt its purchases of US government bonds, with Wall Street stocks also opening lower.

Bloomberg News reported that officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of US Treasuries, citing people familiar with the matter.

The dollar tumbled against the euro, which shot up above $1.20, and against the yen.

"If the reports turn out to be true and China no longer sees Treasuries as an attractive option, the repercussions could be significant as the country is one of the biggest holders of US debt," said Craig Erlam, senior market analyst at currency trading firm OANDA.

Fewer Chinese purchases of US bonds would likely see interest rates paid to attract buyers climb higher, and thus the US Federal Reserve would have less need to hike rights.

"The tightening effect of such measures would likely have an impact on how many times the Federal Reserve raises interest rates this year, which is why we’ve seen a corresponding drop in the dollar," said Erlam.

A senior US official downplayed the impact of possible scaledown of Chinese purchases of Treasuries.

"The US treasury market is a deeply robust market within the world (and) with our economy strengthening it will remain a deeply robust market," US Under Secretary of the Treasury David Malpass said during a visit to Brussels.

Wall Street stocks, after closing at record highs on Tuesday, were on the back foot in Wednesday trading.

The Dow was down 0.2 percent in late morning trading.

Meanwhile in Europe, London's benchmark FTSE 100 index hit a record intra-day high of 7,756.11 points. It closed the day up 0.2 percent at 7,748.51.

In the eurozone, Frankfurt's DAX 30 dropped 0.8 percent and the Paris CAC 40 shed 0.4 percent.

Elsewhere, a rally across Asia that welcomed in 2018 looked to have run out of steam with most markets slipping into the red on profit-taking, but Hong Kong rose for a 12th day as share prices in energy groups climbed against a backdrop of firming oil prices.

Hong Kong's main stocks index is now less than 900 points off its record high of 31,958.41 hit in October 2007.

Shanghai finished up 0.2 percent, a ninth straight advance, but Tokyo ended 0.3 percent down.

- Firm oil prices -

Despite the losses on broader markets, energy firms stood out as oil pushed higher.

Crude has more than doubled from its lows below $30 in early 2016, supported by an output freeze deal between OPEC and Russia and, recently, tensions in the oil-rich Middle East.

Market-watchers say unrest in key producer Iran could dent the country's capacity, while others point out that any suppression of protests by Tehran could also lead Trump to reimpose export sanctions.

Oil futures have won support this week also from data showing a huge drop in US stockpiles as a big freeze in the northeast of the country fans demand for heating fuel.

Data released Wednesday by the US Energy Department showed a drop of nearly 5 million barrels, more than the 3.75 million barrels expected by analysts surveyed by Bloomberg.

Since late November US stocks of crude have fallen by around 37.5 million barrels, which has supported prices.

- Key figures around 1630 GMT -

London - FTSE 100: UP 0.2 percent at 7,748.51 points (close)

Frankfurt - DAX 30: DOWN 0.8 percent at 13,280.52 (close)

Paris - CAC 40: DOWN 0.4 percent at 5,504.68 (close)

EURO STOXX 50: DOWN 0.4 percent at 3,607.87

New York - DOW: DOWN 0.2 percent at 25,347.65

Tokyo - Nikkei 225: DOWN 0.3 percent at 23,788.20 (close)

Hong Kong - Hang Seng: UP 0.2 percent at 31,073.72 (close)

Shanghai - Composite: UP 0.2 percent at 3,412.83 (close)

Euro/dollar: UP at $1.1971 from $1.1936 at 2140 GMT Tuesday

Pound/dollar: DOWN at $1.3518 from $1.3539

Dollar/yen: DOWN at 111.47 yen from 112.61 yen

Oil - Brent North Sea: UP 19 cents at $69.01 per barrel

Oil - West Texas Intermediate: UP 36 cents at $63.62

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