FOREX-Dollar gains ground as U.S. budget talks stall

Fri Dec 21, 2012 9:29am EST

Related Topics

* "Fiscal cliff" uncertainty dents growth-linked currencies
    * Boehner fails to muster Republican support for his bill
    * Thin year-end markets may exacerbate currency moves


    By Gertrude Chavez-Dreyfuss
    NEW YORK, Dec 21 (Reuters) - The dollar firmed on Friday
after U.S. budget negotiations to avert spending cuts and tax
increases took a turn for the worse, fuelling concerns the
world's largest economy could slide into recession.
    Republican lawmakers delivered a blow to their leader, House
of Representatives Speaker John Boehner, when they failed to
back a bill designed to extract concessions from President
Barack Obama in the "fiscal cliff" talks. 
    A combination of tax hikes and spending cuts totalling $600
billion is due to kick in within weeks if U.S. legislators fail
to reach a budget deal, a scenario that could result in a U.S.
recession.
    Boehner has scheduled a news conference for 1500 GMT. 
    The budget impasse has boosted demand for the most liquid 
government bonds and currencies such as the dollar and yen at
the expense of growth-linked currencies such as the euro and
Australian dollar.
    "The markets are becoming extremely nervous as time is
running out for any compromise solution," said Boris
Schlossberg, managing director of FX strategy at BK Asset
Management in New York.
    "The greatest fear among investors is that the sudden shock
to U.S. aggregate demand caused by the automatic sequestration
of government spending and the simultaneous hike in taxes could
have a chilling effect on global growth." 
    The dollar index rose 0.26 percent to 79.466, with
near-term resistance at its 200-week moving average of around
79.50. The dollar rose significantly against growth-linked
currencies such as the Australian and New Zealand dollars.
    The euro was down 0.3 percent at $1.3197, its worst
daily showing in two weeks. Europe's common currency has been in
demand in recent sessions due to improved sentiment on euro zone
assets and earlier optimism on the U.S. fiscal cliff.
    The dollar, meanwhile, lagged the yen, as investors trimmed
large short positions against the safe-haven Japanese currency
after the Bank of Japan this week increased its asset purchase
program by less than some had expected.
    Both the dollar and the yen, the most liquid currencies, are
likely to be in demand as long as the outcome of the U.S. budget
talks remains uncertain. Gains could be exacerbated in thin
market conditions before the year's end.
    The dollar was down 0.5 percent at 83.96 yen, well
below its recent 20-month high of 84.62 yen. The yen also rose
against the euro, with the single currency down 0.8 percent at
110.80 yen.  
        
    IMPLIED VOLS RISE
    The Australian dollar fell to US$1.0417, its lowest
since Dec. 4. The Aussie last changed hands at US$1.0431, down
0.5 percent. The New Zealand dollar. meanwhile, dropped
1.1 percent to US$0.8242.
    In the options market, near-term implied volatility rose as
uncertainty about the budget talks grew. Demand to hedge against
excessive price swings usually rises during times of financial
uncertainty. 
    One-month implied volatility rose to 7.2, from
around 6.8 earlier this week. The rise reflected a jump in the
volatility index for European stocks as investors sought
to hedge against sharp corrections in shares. 
    Traders also reported demand for dollar/yen implied
volatilities. One-month dollar/yen volatility rose
above 8 vols from around 7 in the middle of the week.   
    Traders pared bets against the yen, which has been pressured
in recent weeks by expectations that a new Japanese government
will push the Bank of Japan into more forceful monetary easing.
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