December 19, 2012 / 10:42 PM / 5 years ago

FOREX-Euro gains trimmed after firm German data; yen drops

* Euro retreats from 16-month high vs yen
    * Euro near break-even vs dollar after touching 8-1/2-month
    * German Ifo rises for 2nd straight month
    * White House rejects Republican "Plan B" on budget talks
    * BoJ expected to ease policy on Thursday

    By Gertrude Chavez-Dreyfuss and Daniel Bases
    NEW YORK, Dec 19 (Reuters) - The euro touched an 8-1/2-month
high against the U.S. dollar on Wednesday after
stronger-than-expected German business confidence data, only to
be undermined by a souring of the budget talks in Washington.
    The euro's advance, also bolstered by increased optimism
about debt-plagued Greece, brought it to a 16-month peak against
the yen, before optimism faded in thin pre-holiday trade.
    Against the dollar, the yen weakened to a more than
1-1/2-year low on expectations the Bank of Japan will ease
monetary policy at the end of a two-day meeting Thursday.
    The euro came off its highs against the greenback after the
White House made known its displeasure with the opposition
Republican plan on the budget, undermining recent tepid
    "The fiscal cliff is the issue today as it seems like we're
at another state of impasse, so that took a bite out of the euro
as risk appetite fell," said Steven Englander, global head of
G10 currency strategy at CitiFX.
    The thin holiday volumes meant there was little
follow-through on trades as the day wore on, Englander said, and
risk appetite was further undermined as the U.S. stock market
reversed early gains to end lower. 
    U.S. President Barack Obama on Wednesday threatened to veto
a Republican tax plan because it does not do enough to raise
taxes on the wealthy. 
    If U.S. policymakers do reach a compromise to avert steep
tax increases and spending cuts early next year, currencies that
tend to gain on a better global growth outlook - like the euro
and Australian dollar - should benefit at the expense of the
safe-haven dollar.
    There is still the chance for the euro to extend its gains
further, say analysts, noting year-end demand from corporate and
long-term investors in thin trading conditions. Currency
speculators are also cutting short euro positions built earlier
this year as worries about the euro zone have eased.
    On Wednesday, Germany's Ifo survey showed business sentiment
rose for a second straight month in December, raising hopes that
Germany, Europe's largest economy, will get back on track after
stumbling a bit the last few months. The expectations component
of the Ifo survey also increased. 
    "We had good data from Germany, plus we're getting the sense
that there is a smooth resolution of the Greek problem," said
Vassili Serebriakov, currency strategist at BNP Paribas in New
    The euro rose 0.28 percent to 111.68 yen after
hitting 112.49, its highest since August 2011. Investors took
out a reported options barrier at 112 yen.
    Against the dollar, the single euro zone currency 
rose as high as $1.3308, its strongest level since early April.
By late New York trade, the euro was trading at $1.3233, a gain
of just 0.03 percent on the day.
    On Tuesday, ratings agency Standard & Poor's raised Greece's
credit rating after the country completed its bond buyback
program. S&P gave Greece a stable outlook given the euro zone
countries' commitment to support Greece's membership in the
European bloc. That helped the euro trade on a firmer note
    Traders also said a year-end squeeze of short positions has
further underpinned the euro, although the jury is out on how
much further the currency can profit from this.
    The dollar index fell to a two-month low of 79.008
before ricocheting higher in the New York afternoon to 79.320,
nearly unchanged on the day.
    The dollar rose against the yen to a 20-month high of
84.61 yen as it broke through an option barrier at 84.50. It
triggered stop-loss buy orders above that level. The dollar last
changed hands at 84.39 yen, up 0.23 percent.
    Traders reported steady buying of short-dated topside
strikes in the dollar/yen options, reflecting the likelihood of
more weakness in the yen. 
    Expectations of looser policy from the BoJ, which tend to
weigh on the yen, have been bolstered by the weekend's landslide
election victory for Japan's Liberal Democratic Party, which is
committed to aggressive monetary easing.
    The BoJ concludes a two-day policy meeting on Thursday and
is widely expected to announce another round of monetary easing.
    Fourteen of 19 economists polled by Reuters last week said
they expected the BoJ to ease this week, most likely by
increasing its 91 trillion yen ($1 trillion) asset-buying and
lending program by up to 10 trillion yen. 
    Some analysts warned that BoJ measures could fall short of
expectations, leading some to buy back the yen.

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