The Japanese yen and U.S. dollar strengthened as investors sought perceived safety on concern U.S. deficit- reduction talks will fail to avert spending cuts and tax increases that threaten to push the economy into a recession.
The 17-nation euro pared a weekly advance versus the greenback after House Republican leaders canceled a scheduled vote on Speaker John Boehner’s plan to allow higher tax rates for annual incomes above $1 million. The shared currency declined the most in two weeks after a report said Italian Prime Minister Mario Monti will resign. The New Zealand dollar led declines in higher-yielding currencies.
“We’ve seen the more sensitive risk currencies get hit,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said in a telephone interview. “To actually get an agreement with the Democrats and Obama is going to take more time and add more uncertainty around the fiscal cliff.
The yen strengthened against all its major counterparts, appreciating 0.5 percent to 111.16 per euro at 10:22 a.m. New York time. The dollar added 0.4 percent to $1.3192 per euro, paring its weekly loss to 0.2 percent. It weakened 0.2 percent to 84.25 yen.
Rand Leads
The South African rand leads all major currencies this month against the greenback, appreciating 4.1 percent. The yen has fallen the most out of 16 counterparts versus the dollar, decreasing 2.1 percent.
South Korea’s won has appreciated more than all of its peers versus the dollar this quarter, adding 3.5 percent. The Norwegian krone has been the second-biggest gainer, increasing 2.9 percent.
The Brazilian real has lost 10.1 percent versus the dollar in 2012, while the yen has declined 8.7 percent. The Mexican peso leads all 16 of the dollar’s biggest peers with a gain of 8.3 percent.
Implied volatility, which signals the expected pace of currency swings, for the currencies of Group of Seven nations was at 7.63 percent, after reaching 7.09 percent on Dec. 17, its lowest closing level since July 2007, according to a JPMorgan Chase & Co. index. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profit.
Deficit Talks
Political leaders in Washington are debating how to avoid the so-called fiscal cliff, the more than $600 billion in automatic tax increases and spending cuts that will take effect in January unless Congress acts.
Boehner, an Ohio Republican, said in a statement yesterday his tax measure “did not have sufficient support from our members to pass.” A House leadership announcement said the chamber will hold no more votes until after the Christmas holiday and will return “when needed.”
The speaker said he will call President Barack Obama, according to Representative Steven LaTourette of Ohio.
Australia’s currency slid as much as 0.6 percent to $1.0417, the least since Dec. 4, while New Zealand’s dropped 1.3 percent to 82.32 U.S. cents.
The Standard & Poor’s 500 Index slid 0.8 percent.
Trend Lines
“We’re seeing some correction of recent trends,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “Going into year-end with continued uncertainty on the U.S. fiscal front means we’re likely to see some caution in the market. However, we are expecting there to be some sort of agreement in place by the end of the year to reassure markets.”
Monti will tender his resignation to Italian President Giorgio Napolitano today after Parliament approves budget legislation. The Cabinet is scheduled to meet at 7 p.m. in Rome, news agency Ansa reported.
The prime minister said Dec. 8 that he intended to resign because former Premier Silvio Berlusconi’s party withdrew support for his government.
“His departure is something that’s going to weigh on the euro,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York, said in a telephone interview. “He’s done a good job as prime minister in terms of trying to implement austerity measures and get the fiscal house in order there.”
Yen Decline
Even as the U.S. budget talks stall, the yen is still headed for a weekly decline against most of its 16 major peers.
The Bank of Japan yesterday increased its asset-purchase fund to 76 trillion yen ($900 billion) from 66 trillion yen and kept its inflation target at 1 percent, while saying it will discuss “medium- to long-term price stability” at its meeting in January.
Incoming Japanese Prime Minister Shinzo Abe has called for a doubling of the central bank’s inflation goal to 2 percent and unlimited easing to revive growth.
“Yen selling has been picking up in a short period of time,” said Yoshitsugu Fujita, assistant vice president of global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “In the medium term, Abe’s ability to deliver his pledge on monetary and fiscal stimulus will remain a focus for markets.”
