* 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 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
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 dollar pressed home its advantage in Asia, nearing 84.00
yen JPY= and pushing the euro within range of support levels
just above and below $1.3200 EUR=.
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
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)