LONDON, Jan 4: The dollar fell to a two-month low point against the euro on Wednesday after minutes to the latest meeting of US rate-setters indicated that US borrowing costs were nearing their peak, analysts said.

Meanwhile the Chinese yuan hit the highest level against the dollar since a revaluation last July, following the launch of a new trading system aimed at giving market forces a greater say in determining the rate.

The euro rose to $1.2069 in European trading from $1.2013 in New York late on Tuesday.

The dollar eased to 116.06 yen from 116.19 on Tuesday.

The euro at one point on Wednesday reached $1.2096, the highest level since October 28.

The dollar first came under heavy pressure in overnight New York trade after the minutes from the Fed’s December 13 meeting suggested the end was in sight to what have been 13 interest rate hikes in succession by the US central bank.

The minutes showed that Fed decision-makers agreed that “some further measured policy firming” would be needed to keep inflationary pressure in check.

But in a phrase seized upon in the markets, the minutes added that most Fed members believed the number of additional firming steps required probably would not be large.

Calyon analyst Mike Carey said: “The market interpreted the Fed Dec 13 minutes as dovish, and although we believe the Fed still has some way to go before rates peak, the dollar looks increasingly vulnerable.

The dollar is set to weaken further over the short-term, especially at a time when upbeat eurozone data raises the prospects of further ECB rate hikes, he added.

The dollar was buoyed for most of 2005, following a three-year downturn, by a growing focus on interest rate differentials around the world.

The Fed in December lifted its benchmark rate by a quarter point to 4.25 per cent.

The European Central Bank was meanwhile expected to raise interest rates again in coming months, having increased its key refi rate by a quarter of a percentage point to 2.25 per cent in November, the first increase for more than five years.

The dollar weakened to 8.0675 yuan from the previous close on December 30, of 8.0702.

A Chinese state bank trader said: Since all market players expect the yuan to appreciate (further), it is likely that yuan gains will speed up as market forces are given more power now.—AFP