* Euro sags as important supports draw nearer
* Dollar supported by yield rise, tax plan impact on growth
By Charlotte Cooper and Masayuki Kitano
TOKYO/SINGAPORE, Dec 8 (Reuters) - The dollar firmed and looked set to climb further on Wednesday, having powered up across the board the day before on the back of a spike in U.S. bond yields, while the euro slippped towards some significant support levels.
The greenback rose sharply on Tuesday, gaining 1 percent on the yen and rising against the likes of the Australian dollar after U.S. Treasury yields surged on a proposed extension in U.S. tax cuts, which fuelled concerns about inflation and the cost of the massive debt burden.
The rise in yields and widening in yield spreads is broadly seen as dollar supportive near-term, despite the fiscal concerns, while the U.S. economy stands to get a boost from the tax deal, which could lift growth next year and also lessen the case for bigger monetary stimulus from the Federal Reserve.
“It could be that the market is somewhat buoyed for now by the fact that the U.S. growth outlook for 2011 at least will probably be a lot better than what we all thought a couple of weeks ago,” said Sue Trinh, senior FX strategist at RBC.
For analysis on US tax deal [ID:nN07277043]
Full coverage of tax and deficit debates [ID:nN06200548]
Reuters Breakingviews column [ID:nN07158253]
Graphic: Tax proposal: record deficit, more growth
David Forrester, G10 FX strategist for Barclays Capital in Singapore said the dollar’s outlook appeared well supported.
“The Obama agreement to extend Bush tax cuts, that places less of an onus on monetary policy to stimulate the U.S. economy,” he said.
The correlation between the dollar and long-term Treasury yields has declined recently, Forrester said, which could be due in part to position squeezing, or long liquidation, and thinning volumes as the year-end draws near.
Still the yield jump does make the dollar more attractive to those chasing higher yields and cuts the yield advantage of currencies such as the Australian dollar. The Australia/U.S. 10-year yield spread narrowed to 238 basis points, well off a November high of 275.
“For the dollar, how risk responds will be less important than whether other competing government nominal and real yields (notably Bunds and JGBs) keep up with Treasuries,” said Alan Ruskin, global head of currency strategy at Deutsche Bank.
“If 10-year U.S. yields consolidate in a 3 percent to 3.25 percent range, I could see the dollar and euro sharing the role of financing currencies, as the other side of a muted long emerging/commodity trade,” he wrote in a note.
The dollar, which made its biggest one-day gain against the yen in nearly three months on Tuesday, rose a further 0.5 percent to 83.88 yen, nearing an 84.00-84.40 resistance band that has capped its recent rally.
The euro fell 0.3 percent $1.3214 EUR=, nearing the bottom of its recent $1.3200-3450 range. But its failure to sustain moves above $1.3400 suggested it might probe lower, with a sustained break of $1.3180 support opening the way for a test of $1.3060/50.
Ireland moved a step closer to securing bailout funds after passing the first in a series of votes in its toughest budget on record but traders said investors were still likely to sell the euro on any bounce given broader worries about the European Union’s ability to keep debt problems from spreading. (Additional reporting by Ian Chua in Sydney and Reuters FX analysts Rick Lloyd in Singapore and Krishna Kumar in Sydney; Editing by Edwina Gibbs)