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FOREX-Dollar rallies on fear of more budget fights
January 3, 2013 / 2:40 PM / in 5 years

FOREX-Dollar rallies on fear of more budget fights

* Dollar index rises to highest since mid-December
    * Worries about more budget wrangling drive safety demand
    * Yen rises versus dollar, euro after recent weakness


    By Wanfeng Zhou
    NEW YORK, Jan 3 (Reuters) - The dollar climbed to a
three-week high against a basket of currencies on Thursday as
concerns about more budget wrangling in Washington drove
investors to the more liquid U.S. currency.
    While lawmakers reached a deal to avert the "fiscal cliff"
of huge tax hikes and spending cuts, the agreement set up
potentially bruising showdowns over the next two months on
spending cuts and an increase in the nation's limit on
borrowing. 
    "We really just kicked the can down the line and we're set
up for another flight on the hill in the next month and a half
or so," said John Doyle, currency strategist at Tempus
Consulting in Washington. "That put a damper on overall risk
appetite."
    The dollar index, which tracks the greenback versus
six major currencies, rose to 80.229, the highest since Dec. 11.
It was last up 0.3 percent at 80.114.
    "There could be a messy two months ahead and we see the
dollar index reclaiming some ground," said Jane Foley, senior
currency strategist at Rabobank.     
    Investors often see the U.S. currency as a safe haven and
buy it during times of market uncertainty, even when that
uncertainty stems from the United States.
    Highlighting market concerns that the U.S. deficit issues
remain unresolved, ratings agency Moody's Investors Service said
the United States must do more to rescue its Aaa debt rating
from its current negative outlook.
   Standard & Poor's said the fiscal deal does not affect its
negative view of the U.S. credit outlook, and said more work
remains ahead for policymakers. 
    The euro fell 0.6 percent to $1.3108. It had earlier
fallen to $1.3082 according to Reuters data, the weakest since
Dec. 14, after stop-loss sell orders were triggered below
$1.3090. Traders said the euro's failure to break above $1.33 in
the previous session drew sellers into the market.
    Strategists also said the current weakness in the euro could
persist as the euro zone economy falls deeper into recession and
on increasing prospects of an interest rate cut by the European
Central Bank.
    The euro fell 1.1 percent to 113.90 yen as
investors took profits on its rise to an 18-month high of 115.99
yen on Wednesday.
    "Euro/yen at around 115 levels was starting to look a bit
overdone and the euro may actually lose ground against the yen
in the coming weeks. It's moved too far too fast," said Colin
Asher, senior economist at Mizuho Corporate Bank.
    The dollar fell 0.6 percent to 86.84 yen, after
climbing as high as 87.36 earlier in the global session, the
highest since July 2010.
    Over the past few weeks, the yen has weakened on
expectations that a new Japanese government led by Prime
Minister Shinzo Abe will push the Bank of Japan into further
monetary easing to beat deflation.
    Analysts said the yen is likely to remain vulnerable until
the BOJ's policy meeting on Jan. 21-22.
    The dollar briefly cut losses against the yen and gained
versus the euro after data showed U.S. private-sector employers
added more new jobs than expected last month even as a possible
budget crisis loomed. Separate data showed U.S. initial jobless
claims rose last week. 
    Later in the session, the Federal Reserve will release the
minutes of its latest policy meeting. On Friday, the U.S.
government will release its closely watched monthly nonfarm
payrolls report.

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