Dollar Weakens as Obama Says Deficit Deal Is Close

by on January 1, 2013 9:49 am GMT

The dollar fell against most of its biggest peers as President Barack Obama said Congress is “close” to a deal to protect all but top earners from a tax increase as part of deal to avert the so-called fiscal cliff.

The yen weakened to a 28-month low against the greenback after Finance Minister Taro Aso told reporters at a Dec. 28 briefing that the U.S. should have a stronger dollar. The 17- nation euro fell against most of its 16 major peers as German Chancellor Angela Merkel said the region’s debt crisis was “far from over.”

“The broader trend is towards an improvement in risk appetite, as headlines seem to suggest a short-term fiscal cliff deal will be passed,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York, said in a telephone interview. “That should broadly weigh on the dollar.”

The dollar gained 0.2 percent to $1.3193 per euro at 5 p.m. New York time. The U.S. currency appreciated 0.9 percent to 86.75 yen, reaching the strongest since Aug. 2, 2010. The yen lost 0.8 percent to 114.46 per euro.

Real Falls

The Brazilian real declined 9 percent versus the dollar in 2012, losing the most after the 11.3 percent decline for the yen. The Mexican peso was the biggest winner, adding 8.4 percent.

The South Korean won has appreciated the most versus the dollar this quarter, adding 4.4 percent. The Norwegian krone has been the second-biggest gainer, increasing 2.9 percent.

The South African rand leads all major currencies this month against the greenback, appreciating 5.1 percent.

The White House and congressional negotiators agreed to contours of a budget deal including tax cut extensions, with the remaining sticking point being how to avert automatic federal spending cuts, said an official familiar with the talks..

“They’re progressing,” Senate Majority Leader Harry Reid, a Nevada Democrat, said of the talks in an interview as he entered the Capitol this morning. Asked if he thought a deal could be reached today, Reid said, “I really hope so. We’re not there yet, though.”

Without an agreement, more than $600 billion in tax increases and spending cuts, known as the fiscal cliff, are set to take effect in the U.S. in January.

’Dollar Negative’

“The medium-term impact is dollar negative,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS) in Toronto, wrote in a note to clients. “The combination of aggressive Federal Reserve policy, the lack of a credible fiscal plan, a challenged political system and the impact of the fiscal drag should weigh on the dollar.”

The dollar declined 2.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen slid 15.1 percent and the euro fell 1 percent.

The euro weakened as Merkel said the economic environment will be more difficult in 2013 and Europe’s sovereign debt crisis was isn’t yet over though progress has been made.

“The reforms that we’ve agreed on are starting to take effect,” she said in a New Year’s television speech to the nation, sent today in advance by e-mail. “Nevertheless, we still need a lot of patience. The crisis is far from over.”

The euro has strengthened versus the greenback in 2012, ending a two-year losing streak, as the European Central Bank unveiled a bond-buying program in September to contain the region’s debt crisis.

Futures Positions

Futures traders cut bets the euro will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on a drop in the euro compared with those on a gain, so-called net shorts, was 2,549 on Dec. 25, the least since September 2011, the data showed Dec. 28.

The yen has slumped versus the dollar this month as the election of Prime Minister Shinzo Abe increased the likelihood the nation’s policy makers will step up measures to weaken the currency.

“Foreign countries have no right to lecture us,” Japan’s Aso told reporters in Tokyo on Dec. 28. He said the U.S. should have a stronger dollar and questioned whether Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations.

Japan Policy

The BOJ will hold its first 2013 policy meeting on Jan. 21- 22 when it releases updates on growth and consumer-price forecasts. Governor Masaaki Shirakawa said the BOJ will discuss details of an inflation target requested by Abe at the meeting, according to the Nikkei newspaper.

“What we’re witnessing here is an incredible shift in policy,” Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene. “On top of that, they’re showing a new willingness to confront G-20 partners on currency issues. We could see a totally different type of policy framework.”

Declines in the yen may temper as the 14-day relative strength index against the dollar touched 18.3, below the 30 level for the 14th straight day. A reading of 30 or lower indicates an asset may have fallen too far too quickly.