Such a move could lead to the dollar weakening even further, affecting other parts of the world economy. For one, it could lead to higher prices of oil and other commodities as traders buy them as a hedge against a falling dollar.

The FT's online report yesterday said that one large sovereign fund in the Gulf had cut its dollar-denominated holdings from more than 80 per cent a year ago to less than 60 per cent, but gave no source.

The FT also said that China's State Administration of Foreign Exchange (Safe) had been looking to strike deals with private equity firms in Europe as part of a plan to reduce its US dollar holdings, citing people familiar with the matter.

A shift at Safe would be significant because it manages all of China's US$1.8 trillion (S$2.4 trillion) in foreign currency reserves.

Traders said the US dollar eased a little yesterday morning as the report circulated, though investors have long suspected that sovereign funds would be inclined to trim their holdings given the long fall in the currency.

'That's something that's been happening over the course of time, that there's been a supply of dollars on any given rally,' said Mr Rick Lloyd, the head of G10 currency trading at ABN Amro in Singapore.

'The dollar just seems to be getting pushed around in the backwater of flows in other markets at the moment,' he added.

The dollar had bounced on Wednesday after US financial shares staged a big rally and a high inflation reading seemed to rule out any further cut in US interest rates.

Yesterday, the euro was at US$1.5838, up from US$1.5817 late in New York but off the week's record high of US$1.6038.

The FT report said that Safe has been holding talks with Europe-based private equity firms about putting billions of dollars into their latest funds, precisely because these funds are not dollar-denominated.

By allocating money to Europe-based private equity firms, Safe could diversify away from the dollar, at least at the margin, without unnerving the currency markets and driving the dollar down in a disorderly manner, the FT added.

In addition, Safe is encouraging the private equity firms with which it has relationships to make investments in natural resources companies in markets outside the United States, in part to hedge its exposure to the dollar, said the report.

REUTERS