By Wanfeng Zhou
NEW YORK Dec 31 The dollar rose against major
currencies on Monday as growing concern Washington would fail to
reach a last-minute deal to avert the "fiscal cliff" drove
investors to the safe-haven U.S. currency.
U.S. Senate Majority Leader Harry Reid said on Monday, ahead
of a midnight deadline, that congressional negotiators still
needed to bridge differences to avoid the cliff and avert $600
billion in gradual tax hikes and spending cuts.
"Going over the fiscal cliff is temporarily positive for the
U.S. dollar as it drives some risk aversion," said Camilla
Sutton, chief FX strategist at Scotia Capital in Toronto.
"However the medium-term impact is U.S. dollar negative,"
she said. "The combination of aggressive Fed policy, the lack of
a credible fiscal plan, a challenged political system and the
impact of the fiscal drag should weigh on the dollar."
The euro was down 0.2 percent on the day at $1.3187,
with selling accelerated just before the London close. Near-term
support was seen around $1.3142, the low set on Dec. 17,
according to Reuters data. Any euro gains would be capped at
$1.3308, the 8-1/2 month high on Dec. 19, traders said.
The euro has gained 1.8 percent against the dollar this
year, overcoming worries about a euro zone break-up and any
sovereign debt defaults.
Sentiment toward the euro improved after the European
Central Bank pledged to buy bonds of indebted peripheral
countries. Positioning data showed speculators sharply reduced
bets against the euro in the week ended Dec. 24.
The euro rose 0.3 percent to 114.02 yen, below a
17-month high of 114.68 yen set on Friday. The euro has risen 15
percent against the yen in 2012, putting it on track for its
biggest yearly percentage gain since it was launched in 1999.
The yen hit its lowest in more than two years versus the
dollar on Monday and was on track for its largest annual drop in
seven years, pressured by expectations of more monetary easing
by the Bank of Japan.
The dollar was up 0.6 percent at 86.52 yen. It has
risen as high as 86.66 yen, according to Reuters data, the
highest since early August 2010.
On the year, the dollar is up 12.4 percent against the yen,
the best annual gain since 2005.
With a new Japanese government led by Prime Minister Shinzo
Abe expected to pursue aggressive monetary easing and heavy
fiscal spending to beat deflation, analysts see the yen staying
under pressure in 2013. Any drop in the dollar against the yen
would likely to be limited.
NO MAJOR SELLOFF
Failure to reach a deal in U.S. budget talks could keep the
dollar firm as investors seek refuge in the more liquid U.S.
currency. Any progress in talks would be positive for riskier
currencies such as the euro and Australian dollar.
Congress could pass legislation in 2013 that retroactively
prevents the United States going over the fiscal cliff, an
option that is viewed as politically easier.
"The markets have presumed now there will be some sort of a
agreement around the middle route," said Neil Mellor, currency
strategist at Bank of New York Mellon.
Mellor said a major selloff in growth-linked currencies on
Wednesday, when trading resumes after the New Year's Day
holiday, was unlikely as it would take a few days before volumes
rise to normal levels and investors return with fresh annual
Many investors say the impact of the fiscal measures will
only be felt gradually and that the U.S. economy does not face
immediate catastrophe if a deal is not reached.