FOREX-Dollar falls vs high-yielding currencies; yen sinks

Thu Jan 3, 2013 3:21am IST

* U.S. Congress approves deal to avoid "fiscal cliff"
    * Other issues such as spending cuts, debt ceiling remain
unresolved
    * U.S. factories returned to growth in December; jobs data
due Friday

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Jan 2 (Reuters) - The dollar slid against
high-yielding currencies such as the Australian dollar, while
the yen sold off on Wednesday after U.S. lawmakers forged a
last-minute deal to avert huge tax increases and spending cuts,
fueling demand for riskier investments.
    Investors tend to sell the dollar and yen, both highly
liquid currencies, when risk appetite is strong.
    But the dollar's and yen's losses could be temporary because
of potentially contentious negotiations ahead about spending
restraints and the debt ceiling.
    U.S. Treasuries fell on the fiscal agreement as investors
felt comfortable moving away from the safety of government
bonds, while equities posted sharp gains.
    The dollar, however, rebounded against the euro, as some
traders booked profits after driving the common currency to a
two-week high just below $1.33.
    Although the passage of the bill to avoid the "fiscal cliff"
removed some near-term uncertainty, it did not end the political
showdown on the budget. Battles over the sequester, as the
automatic spending cuts are known, and the U.S. debt ceiling
will come to a head in February. 
    "While the U.S. is not now plunging off a fiscal cliff, it's
still going down a steep fiscal ski hill that will take a
meaningful bite out of economic growth," said Avery Shenfeld,
chief economist at CIBC World Markets in Toronto.
    "The sense of closure that investors are feeling today could
soon dissipate as the focus shifts to the bargaining ahead."
    Higher-yielding and growth-linked currencies rallied. The
Australian dollar rose 0.9 percent to US$1.0497 after
hitting a two-week high. The New Zealand dollar gained
0.7 percent to US$0.8338, while the Canadian dollar rallied
versus the greenback, which fell 0.7 percent to C$0.9858.
    The euro fell 0.2 percent to $1.3185. It had earlier hit a
high of $1.3299, according to Reuters data, the highest
in two weeks, and not far from an 8-1/2-month high on Dec. 19.
    "It looks as though someone forgot to tell the euro that
it's supposed to go higher after the fiscal cliff agreement,"
said Matthew Lifson, senior analyst and trader at Cambridge
Mercantile Group, in Princeton, New Jersey.  
    The euro has gained nearly 10 percent since late July when 
European Central Bank President Mario Draghi said the ECB would
do "whatever it takes" to save the euro. 
    Strategists, however, said the euro could see renewed
pressure if concerns about the weak euro-zone economy re-emerge.
    Euro-zone factories sank deeper into recession in December,
data showed on Wednesday. Markit's Eurozone Manufacturing
Purchasing Managers' Index (PMI) fell to 46.1 from November's
46.2. It has been below the 50 mark that divides growth from
contraction since August 2011. 
    In contrast, data on Wednesday showed U.S. manufacturing
ended 2012 on an upswing despite fears about the fiscal cliff,
with factories returning to growth in December after contracting
the previous month, according to the Institute for Supply
Management. 
    "All the noise (on the fiscal cliff) from the end of the
year in the U.S. is over," said Cambridge's Lifson. "It may be
time to concentrate on the economies, and at present, it looks
like European economies are in worse shape than the U.S.
economy. Advantage, U.S. dollar? It just may be."
    On Friday, the ISM services data and the closely watched
U.S. non-farm payrolls data for December will be released.
 
    The euro rose 1.3 percent to 115.99 yen on Reuters
data, the strongest since July 2011, and was last up 0.5 percent
at 115.07 yen. Option barriers were cited at 116 yen.
    The dollar rose 0.7 percent to 87.26 yen, having
touched 87.33 yen earlier, the highest since late July 2010.
    The yen has also come under pressure in recent weeks on
expectations that a new Japanese government will push the Bank
of Japan into more forceful monetary easing.       
    Speculators' bets against the yen hit more than five-year
peaks in December, but have eased in the past two weeks. Some
strategists warned of a potential rebound in the yen after the
next BOJ meeting on Jan. 21-22.
    In the options market, one-month dollar/yen implied
volatility touched an 8-1/2 month high of 9.2 on
Wednesday, according to Thomson Reuters data, as demand to hedge
against further yen weakness gathered pace. It was last at 8.65
vols, some way off the mid-December low of 7.1.
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