FOREX-Euro rises to 7-1/2-month high on hopes of US budget deal

Tue Dec 18, 2012 4:17pm EST

Related Topics

* Boehner presses forward to avoid fiscal crisis
    * End of year demand could see euro testing March high
    * S&P upgrades its debt rating on Greece
    * Yen vulnerable to expectations of easing

    By Julie Haviv
    NEW YORK, Dec 18 (Reuters) - The euro rose against the
dollar for a seventh straight session on Tuesday, hitting its
highest level in more than seven months, as signs of progress in
U.S. budget negotiations buoyed demand for riskier assets.
    The safe-haven U.S. dollar and Treasury bonds fell, while
global stocks rallied on raised expectations that Congress will
reach a deficit reduction deal by the end of the year.
    If an agreement is not reached in less than two weeks the
United States will hit the so-called "fiscal cliff" of automatic
tax increases and spending cuts next year. This would have the
potential to send the world's largest economy back into
recession.
    A deal to avoid the "fiscal cliff" looked closer on Tuesday
after House of Representatives Speaker John Boehner kept the
support of his Republican colleagues for compromises in talks
with President Barack Obama. 
    Obama's latest offer to reach a deal with Republicans in the
U.S. House of Representatives is a "good faith" effort to reach
a compromise, the White House said. 
    "Arguably the market's mood has moved from one of hope to
encouragement, favorable sentiment that is underpinning some
foreign currencies," said Nick Bennenbroek, head of currency
strategy at Wells Fargo in New York.
    "While trading conditions are somewhat thin and could
contribute to some unpredictable moves, our bias is for further
foreign currency gains in the near term," he said.
    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 at $1.3224 after
earlier hitting a high of $1.3238, 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 79.342, down 0.3 percent. 
    Euro strength also helped push Spanish and Italian yields
lower, further raising risk appetite. 
    It has so far been a banner month for the euro, appreciating
about 1.6 percent against the dollar, partly due to faded fears
of a U.S. fiscal crisis, but mostly due to less concern about
the euro zone's debt crisis.
    Rating agency Standard & Poor's on Tuesday raised Greece's
sovereign credit rating to B-minus with a stable outlook from
selective default, citing the efforts of the country's European
partners to keep it in the euro. 
    Euro zone partners and the International Monetary Fund have
agreed to unlock 49.1 billion euros in aid by the end of March.
They made the decision to release the long-delayed installment 
after Athens passed austerity measures and completed a debt
buyback. 
    At current prices, the single currency shared by 17
countries has gained 2.7 percent so far in the fourth quarter
and is up 2.1 percent on the year. 
    
    BANK OF JAPAN MEETING IN FOCUS
    The Japanese currency tumbled after the Liberal Democratic
Party surged back to power in an election on Sunday, fueling
expectations the new government will drive the Bank of Japan
toward more aggressive monetary easing.    
    The dollar was last up 0.4 percent at 84.24 yen,
according to Reuters data.
    It earlier hit a session peak of 84.27, not far from a high
of 84.48 yen on Monday, which was its strongest level 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 5 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 5-10 trillion
yen. 
    That would fall short of expectations and could lead some
investors to shed large short positions in the Japanese
currency.
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