FOREX-Euro hits 7-1/2-month high on optimism about US budget talks

Tue Dec 18, 2012 12:06pm EST

Related Topics

* Boehner says Obama budget offer "not there yet"
    * Scope for year-end demand to test March high near $1.34
    * Yen vulnerable to easing expectations

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Dec 18 (Reuters) - The euro rose to its highest in
more than seven months against the dollar and hovered near a
nine-month peak versus the yen on Tuesday as signs of progress
in U.S. budget negotiations lifted overall market sentiment.
    Market players sold the safe-haven dollar on optimism U.S.
policymakers can reach a deal to avoid the "fiscal cliff," a
combination of tax hikes and spending cuts that risks tipping
the world's largest economy back into recession next year if it
is not headed off. The dollar index dropped to a two-month low.
    U.S. President Barack Obama on Monday made a concession,
agreeing to allow the extension of low income tax rates begun
during President George W. Bush's administration for incomes up
to $400,000 per household. He had previously insisted setting
that cut-off at $250,000.
    In response, U.S. House of Representatives Speaker John
Boehner said on Tuesday Obama's budget deal offer "is not there
yet" but he still hopes he can reach an agreement with the White
House. 
    "This marked a dramatic departure from the exaggerated
saber-rattling between Obama and Boehner just two weeks ago,"
said Ravi Bharadwaj, market analyst at Western Union Business
Solutions in Washington.
    A U.S. fiscal deal is viewed as positive for risk-taking 
and should benefit riskier currencies such as the euro at the
expense of the dollar. Euro gains helped push Spanish and
Italian yields lower and boosted demand for European shares.
    Some strategists said year-end investment flows could help
the euro extend its gains to test the late-March high just below
$1.34, although concerns about the euro zone's weak growth
outlook may leave it vulnerable to selling in the new year.
    The euro was last up 0.5 percent on the day at
$1.3223 after hitting a high of $1.3232, its strongest level
since early May. Traders said investors took out option barriers
at $1.32, prompting more euro buying. 
    The dollar index fell to a two-month trough of
79.260. The index was last quoted at 79.320, down 0.3 percent. 
    The Swedish crown rose against the euro to
8.7080 per euro after the Riksbank cut its repo rate by 25 basis
points as expected but said rates would remain on hold for some
time. The outlook wrong-footed some investors who had positioned
for a hint of further cuts in future. 
    The euro was last down 0.4 percent at 8.7249 crowns.
    
    BOJ IN FOCUS
    The yen slid against the euro, with the single currency
rising 0.6 percent on the day to 111.09 yen, within
sight of a nine-month high of 111.30 yen hit on Monday.
    The Japanese currency tumbled after the Liberal Democratic
Party surged back to power in an election on Sunday, fuelling
expectations the new government will drive the Bank of Japan
towards more aggressive monetary easing.    
    The dollar was up 0.2 percent at 84.02 yen, having
hit a high of 84.48 yen on Monday, its strongest since April
2011. Traders cited option barriers at 84.50 yen with stop-loss
buy orders above that level.
    "The outlook for more political pressure on the Japanese
central bank is decidedly negative for the yen," said Omer
Esiner, chief market analyst at Commonwealth Foreign Exchange in
Washington.
    "However, having shed over five percent of its value against
the dollar in the last month alone, the yen may be poised for a
bit of a bounce."
    Analysts said a recovery in the yen could happen if the BoJ
disappoints those expecting more aggressive monetary easing. The
bank holds a two-day policy meeting Wednesday and Thursday.
    Speculators have sold the yen on expectations the BoJ could
adopt a more aggressive asset-buying program. But sources
familiar with the BOJ's thinking have said the most likely
option is for the central bank to increase its asset-buying and
lending program, currently at 91 trillion yen, by another 5-10
trillion yen. 
    That would fall short of expectations and could lead to some
of the large short yen positions being cut.
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