FOREX-Dollar steady vs euro on looming fiscal crises fear

Thu Dec 13, 2012 4:50pm EST

Related Topics

* Fed ties policy to specific economic target

* Fed extends debt-buying in line with expectations

* Speaker of the U.S. House Boehner again rejects Obama's demand

* Yen down across the board on prospects of more easing

By Julie Haviv

NEW YORK, Dec 13 (Reuters) - The dollar held steady against the euro on Thursday after falling for three straight days as investors refrained from actively selling the U.S. currency due to uncertainty surrounding a looming fiscal crisis.

The so-called "fiscal cliff" outweighed dollar-bearish news stemming from Wednesday's Federal Reserve announcement. The Fed, after its two-day policy meeting, said it would extend its bond-buying economic stimulus program into 2013, with a plan to purchase $85 billion a month of mortgage-backed securities and Treasuries.

The Fed's bond buying, called quantitative easing, is negative for the dollar as it is tantamount to printing money and dilutes its value.

The Fed also said interest rates would remain near zero until unemployment falls to at least 6.5 percent, explicitly linking its policy path to unemployment and inflation.

Without higher rates or the Fed scaling back the amount of available dollars in the economy, the dollar's upside is limited. It could gain, however, if the White House and Congress cannot reach a deficit reduction deal by the end of the year.

Failure to reach an agreement will automatically trigger massive spending cuts and tax increases in 2013. This so-called "fiscal cliff" should buoy the dollar due to its safe-haven status.

Congressional Republicans dug in on their opposition to raising taxes on the wealthy, even as polls showed them at a growing disadvantage in the fiscal showdown with President Barack Obama.

Obama will meet Republican Speaker of the House of Representatives John Boehner at the White House around 5 p.m. EST (2200 GMT), a White House official told Reuters.

"We view the Fed decision as notably bearish for the dollar, particularly against currencies whose central banks are not engaging in offsetting type monetary policies; however the uncertainty surrounding the looming fiscal cliff dampens the impact near-term but not the medium-term," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The euro was last flat at $1.3074, having hit a session low of $1.3039 and a session high of $1.3100.

With the Fed actively targeting economic data, the dollar could see a boost if data shows any sign of improvement, analysts said. But they also cautioned that the euro could remain supported in the near term with positive developments in the euro zone and successful bond auctions in Italy.

The European Union reached a landmark deal on Thursday to make the European Central Bank the bloc's top banking supervisor, a move that was seen as a step closer to resolving the debt crisis.

YEN FALTERS

The dollar was expected to rise further against the Japanese currency on expectations the Bank of Japan will ease monetary policy further.

The BOJ meeting will take place after Sunday's election which looks set to see the opposition Liberal Democratic Party clinch a resounding victory. LDP leader Shinzo Abe has been pushing the BOJ for more powerful monetary stimulus.

Part of the reason for the rise in dollar/yen was higher U.S. Treasury bond yields, which makes the dollar relatively more attractive against its low-yielding Japanese peer.

Against the yen, the dollar was at 83.58 yen, up 0.4 percent on the day, according to Reuter data.

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