Euro hits new two-year high against dollar

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The euro surged on Friday to 1.3534 dollars, the highest level since January 3, 2005, on expectations of rising eurozone interest rates.

They added that the foreign exchange market was jittery ahead of a meeting of the Group of Seven (G7) financial chiefs in Washington on Friday, when the health of the global economy and the weakness of the yen are expected to be in focus.

The single currency later stood at 1.3521 dollars, compared with 1.3480 dollars in New York late on Thursday. The euro dipped to 160.06 yen after striking an overnight record of 160.87 against the Japanese unit.

The dollar meanwhile fell to 118.38 yen compared with 119.14 late on Thursday.

"The dollar has been depressed against the euro by the comments of (ECB) President (Jean-Claude) Trichet yesterday (Thursday) following the monetary policy meeting of the European Central Bank," said Paul Chertkow, head of global currency research at The Bank of Tokyo-Mitsubishi in London.

The euro had breached 1.35 dollars on Thursday after the ECB signalled that it was ready to raise eurozone borrowing costs again in June.

Trichet sent a clear signal that the bank was set to raise its key interest rates -- already at a five-and-a-half-year high -- still further in June, after holding rates at 3.75 percent on Thursday.

"Characterising monetary policy as still accommodative, he (Trichet) underpinned the expectation of another 0.25 point increase in the refinancing rate in the eurozone before mid-year," Chertkow added.

The euro has been buoyed in recent weeks by favourable interest rate differentials, analysts said.

In contrast with the ECB, the US Federal Reserve appeared to open the door to a cut in American borrowing costs last month as it kept rates unchanged at 5.25 percent.

Market players were cautious on Friday ahead of the G7 meeting amid speculation that the yen could become a topic of discussion, if only behind closed doors.

The weakening Japanese yen is causing consternation in European capitals, where finance chiefs are worried that the yen-euro exchange rate is penalising eurozone exporters.

"But the chances of strong remarks on a weak yen are very slim this time," said Tokyo-based Commerzbank analyst Ryohei Muramatsu.

"And since foreign exchange rates are stable in an orderly manner right now, there is no need for the G7 to say anything that may possibly disturb the market," he said.

Ahead of the G7 talks, the dollar could face further selling pressure from new data in the United States, with the latest US trade balance data and producer price inflation numbers due later Friday.

The euro was changing hands at 1.3521 dollars, against 1.3480 dollars late on Thursday, 160.06 yen (160.62), 0.6811 pounds (0.6812) and 1.6364 Swiss francs (1.6396).

The dollar stood at 118.38 yen (119.14) and 1.2101 Swiss francs (1.2167).

The pound was being traded at 1.9860 dollars (1.9785).

On the London Bullion Market, the price of gold pulled back to 677.25 dollars per ounce, from 678.50 dollars late on Thursday.

China shifts to euros for Iran oil

By Chen Aizhu

BEIJING (Reuters) - China's state-run Zhuhai Zhenrong Corp, the biggest buyer of Iranian crude worldwide, began paying for its oil in euros late last year as Tehran moves to diversify its foreign reserves away from U.S. dollars.

The Chinese firm, which buys more than a tenth of exports from the world's fourth-largest crude producer, has changed the payment currency for the bulk of its roughly 240,000 barrels per day (bpd) contract, Beijing-based sources said.

Japanese refiners who buy about 500,000 bpd of Iranian crude, nearly a quarter of Iran's 2.2 million-bpd shipments, continue to pay in dollars but are willing to shift to yen if asked, industry sources and officials said separately.

Iranian officials have said for months that more than half the OPEC member's customers switched their payment currency away from the dollar as Tehran seeks to diversify its reserves, but news of the Zhenrong change is the first outside confirmation.

The price of the oil is still based on dollar quotes.

The shift, being watched closely by foreign exchange traders, comes amid an extended row between Tehran and Washington over Iran's nuclear programme.

China, which depends on Iran for about 12 percent of its imported crude oil, has at times used the threat of its United Nations veto to blunt Western measures.

The UN imposed new sanctions on Iran on Saturday as Tehran refused to halt its nuclear programme, targeting arms exports and 28 Iranian individuals and entities.

Iran's central banker told Reuters earlier on Tuesday that Tehran had cut its holding of U.S.-dollar assets to a minimum level of around a fifth of its foreign reserves in response to U.S. hostility, still enough to handle major shocks.

CHINA SWITCHES EARLY

"Most of China's purchases have shifted to euro. It's not difficult so long as our banks can handle that," said a Chinese state oil trader.

Hojjatollah Ghanimifard, head of international affairs at the National Iranian Oil Company (NIOC), told Reuters last week that around 60 percent of its oil income was in non-dollar currencies as almost all of Iran's European clients and some of its Asian customers had agreed to make non-dollar payments.

Iran is China's third-largest crude supplier with daily volume of 335,000 barrels last year. Sinopec Corp. <0386.hk>, Asia's top refiner but a minor lifter of Iranian oil, is still paying in U.S. dollars, said a Sinopec trader.

Japanese buyers, including top refiner Nippon Oil Corp. <5001.t>, said they had all received inquiries from Iran to pay on non-U.S. dollar terms, but were awaiting an official request.

"We are looking at it so that we can switch the currencies any time, but we have not gotten any official requests from them (NIOC). We are doing the transactions in dollars (now)," Nippon Oil chairman Fukuaki Watari told reporters last week.

Sources with other majors refiners concurred.

Iran ranks as Japan's third-largest crude supplier so far this year with daily rate of just under 500,000 bpd.

Tokyo has cautioned world powers against including oil in sanctions they may impose on Iran for its refusal to suspend atomic work, which the U.S. says is aimed at developing a nuclear weapon, but Tehran insists is for generating electricity.

Iran's major European customers include Royal Dutch Shell , France's Total and Spain's Repsol . The United States has banned imports of Iranian crude since 1995.

(Additional reporting by Ikuko Kao in Tokyo)

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