* Euro hits six-week high vs dollar
* Higher money market rates lend support to euro rise
* U.S. congressional negotiators reach budget deal
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 11 The euro rose for a seventh
straight session against the dollar on Wednesday, driven by a
combination of higher money market rates and a growing belief
that the European Central Bank will keep interest rates low for
some time but not cut them.
Overnight lending rates have been creeping higher the last
few sessions, as banks have paid back long-term funding lent by
the ECB at the height of the euro zone debt crisis.
In addition, two-year swap rates have risen as
the ECB has shown unwillingness to ease monetary policy despite
Joe Manimbo, senior market analyst at Western Union Business
Solutions in Washington, said higher short-term rates have
indeed enhanced the appeal of the euro but noted that much of
the euro's outperformance has been a function of investors
reducing short positions.
Overall he said the euro zone still "faces a long road to
recovery," citing recent weak economic data, particularly in
France, the euro bloc's second-largest economy. French
industrial output numbers released on Tuesday showed a decline
for a second straight month.
In midday New York trading, the euro was up 0.2 percent
against the dollar at $1.3794, after hitting a six-week
high of $1.38. So far in 2013, the euro has gained 4.5 percent
versus the greenback, on track for its best yearly gain since
Against the yen, the euro was down 0.2 percent at 141.18 yen
. It was up more than 23 percent versus the Japanese
currency so far in 2013.
The euro has also been supported by European banks
repatriating funds to shore up their capital bases before an ECB
Asset Quality Review (AQR).
Simon Smith, head of research at FxPro, said the euro could
hold "around the upper 1.30s level" early next year. It might
weaken after the AQR, but Smith expects it to fall less against
the dollar than other currencies when the Federal Reserve begins
slowing its huge bond-buying program.
One-year risk reversals - which compare
demand for options on a currency's rising or falling - show a
bias for euro puts, or bets that it will weaken. That suggests
many speculators think the rally will not last.
The dollar, meanwhile, slipped 0.1 percent against a basket
of currencies to 79.85, and fell 0.5 percent versus the
yen to 102.36.
The greenback has weakened in recent sessions on the view
that the Fed will not reduce its economic stimulus until early
next year. James Bullard, the St. Louis Fed president, however,
has kept the window open for a small amount of tapering this
Still, when the Fed does decide to scale back its bond
purchases, any upside for the dollar could be limited since that
move has long been expected. Moreover, when the Fed does taper,
it would be small comfort for the greenback as short-term
interest rates are likely to stay low.
But one ray of hope for dollar bulls is a two-year
bipartisan budget deal reached in the U.S. Congress aimed at
avoiding another government shutdown.
"A complete avoidance of a repeat of the October showdown
and shutdown over the budget and debt ceiling can only be seen
as dollar-positive as it will put the Fed on a faster track
toward the taper," said John Hardy, head of FX strategy at Saxo
Bank in London.
He wondered whether the Fed's December meeting next Tuesday
and Wednesday could set up a January taper move.
The Swiss franc, meanwhile, hit a seven-month high against
the euro, which fell to 1.2201 francs. The euro was
little changed at 1.2217 francs