FOREX-Dollar rallies to two-month high, euro retreats

Wed Nov 7, 2012 8:23am EST

Related Topics

* Obama re-election dents dollar initially, lifts riskier
currencies
    * But rebounds on euro zone, fiscal cliff worries
    * Greek parliament vote on austerity in focus for euro

    By Anirban Nag
    LONDON, Nov 7 (Reuters) - The dollar rose to a two-month
high against a basket of currencies on Wednesday as investors
looked past U.S. President Barack Obama's re-election to the
country's fiscal problems.
    Analysts said the dollar would benefit from safe-haven flows
amid mounting worries over the looming U.S. 'fiscal cliff'. The
world's largest economy risks an economic slowdown and policy
paralysis over a sharp budget tightening due to start next year
unless a deal is reached in Congress to avert it.
    The dollar was up 0.3 percent against its basket at
80.863, its highest in two months.
    The euro fell to a two-month low against the dollar, hurt by
grim economic forecasts for the euro zone and continued
sovereign debt-related worries in Greece and Spain.
 
    The common currency fell to $1.2749, retreating from
a session high of $1.28765 as weaker-than-expected German
economic data also weighed.
    The currency faced further pressure ahead of a Greek
parliamentary vote on austerity measures necessary to secure the
next tranche of bailout cash, without which the country faces
bankruptcy.
    "Uncertainty over the Greek vote and the U.S. fiscal cliff
are both major risk factors which are weighing on the euro,"
said Jane Foley, senior currency strategist at Rabobank.
    "If the Greek vote doesn't go through, there is a lot of
downside risk to the euro as talk of a Greece exit will
re-emerge."
    Prime Minister Antonis Samaras is expected to narrowly win
but the smallest party in his coalition will oppose the
measures, leaving him with a margin of just a handful of votes.
 
    The market also remained concerned that Spain could delay
seeking international aid.
    The European Central Bank will decide on interest rates on
Thursday and while no change is expected, a slew of grim data
out of the euro zone is likely to keep alive chances of further
cuts.
    
    DOLLAR BUOYANT
    Earlier in the day, the clear-cut U.S. election result
lifted stocks and riskier currencies, helping the
higher-yielding Australian dollar rise to its highest in nearly
seven weeks and the Canadian dollar to a three-week peak.
    Obama's re-election was seen as a signal that the Federal
Reserve's easy monetary policy is likely to stay in place,
supporting to demand for riskier assets. 
    But that trend soon fizzled out as investors turned their
attention to the euro zone's problems and the U.S. fiscal cliff.
    The Democrats retained a majority in the Senate but the
Republicans held control of the House of Representatives,
signalling tough budget negotiations, potentially prompting
safe-haven flows into the dollar. 
    "Beyond the initial reaction, the 'risk on' sentiment will
be challenged at some point by the heightened fiscal cliff
threat," David Bloom, global head of FX strategy at HSBC wrote
in a note.
    "We believe this may extend the dollar's weakness, but will
cap and potentially reverse the rally in "risk on" currencies we
expect in the near term."
    Against the yen the dollar fell to as low as 79.81
yen, well below its four-month high of 80.68 yen hit last
week. It recovered to 80.10 yen, still down 0.3 percent as
yields on U.S. Treasuries fell sharply. 
    Analysts at Morgan Stanley said they are maintaining their
bullish strategy for dollar/yen and expected a re-test of the
80.70 high, with a break above there opening the way for gains
towards their 84.00 target.
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