* Dollar index hits 6-week high, 'supercommittee' failure
stokes safe-haven flows
* Euro pressured lower as inter-euro zone yield spreads
* Markets take scant comfort from Spain election results
By Naomi Tajitsu
LONDON, Nov 21 The dollar hit a six-week
high versus a currency basket on Monday after U.S. leaders
failed to agree deficit-cutting measures, darkening the fiscal
outlook and prompting a shift from riskier currencies into the
safety of the U.S. currency.
The dollar index rose to 78.477, its highest since
Oct. 10 as debt problems deteriorated on both sides of the
Atlantic due to ongoing worries that wrangling between European
leaders will protract the bloc's debt crisis.
Investors sought growing yield premiums to hold Italian and
Spanish bonds versus benchmark German debt, pushing the euro to
the day's low versus the dollar.
An overwhelming Spanish vote in favour of a new government
failed to instill optimism about Madrid's ability to deal with
its economic problems.
The failure of Washington's "supercommittee" triggered
selling in risky assets, with European shares falling 2 percent
while currencies considered to be higher risk, including the
euro and the Australian dollar also took a hit.
For the moment, Washington is still expected to push ahead
with $1.2 trillion in automatic spending reductions despite its
inability to find appropriate budget savings, keeping at bay the
risk of an immediate credit rating cut.
So long as Washington avoids a lower rating -- which was
slashed to AA+ a few months ago -- analysts believe the dollar
may continue to benefit from safe-haven flows.
"If the United States fails to reach agreement and we assume
the spending cuts will still be delivered, that would be
acceptable to the ratings agencies," said Adam Cole, global head
of currency strategy at RBC.
But he added: "If the automatic spending cuts are called
into question, that would be problematic for the U.S. credit
rating and by extension for the dollar."
The euro fell 0.4 percent on the day to a session
trough of $1.3435, before pulling back to around $1.3460 as
traders suspected Asian sovereign demand in the $1.3430 region.
The euro also suffered as the yield spread between Spanish
and German 10-year government bonds yawned 10 basis points to
453 basis points, while the Italian/German spread also widened.
The dollar was flat at 76.88 yen, recouping earlier
Many have been surprised by the euro's resilience to the
surge in Italian and Spanish bonds yields which make it ever
more costly for their governments to manage their debt.
"It's been difficult to push it lower despite the problems
in the euro zone," said Arne Lohmann Rasmussen, chief analyst at
Danske in Copenhagen. "From a speculative point of view, the
market is already very short on euro/dollar."
The latest IMM data show that speculators ramped up their
bets to sell the euro last week, leaving limited room to put on
many more new positions to sell.
Analysts at Lloyds argued that in addition to speculators,
longer-term participants have been selling the euro in past
weeks, and that selling from the latter may pick up even if the
IMM data shows limited scope for speculative positioning.
"Any future euro weakness looks more likely to come from
selling from commercial or longer term real money accounts,
which have been reluctant EUR sellers for most of this year,"
they wrote in a note.
Analysts say the European Central Bank's unwillingness to
commit to large-scale bond purchases and Europe's deteriorating
economic backdrop mean financial markets will remain hostage to
stresses in the region, which may hurt the euro.
The European Commission will propose on Wednesday much
tighter control of euro zone countries' budgets and closer
economic monitoring which, if proven to work, could lead in a
few years to some form of joint euro bonds, a senior euro zone
While such a move could help bolster confidence in the
longer term, few think such drastic measures could be taken any
time soon, given Germany's staunch opposition to the idea.