Dollar weakens as Reid cites deficit-deal optimism; Yen falls

The dollar fell against most of its biggest peers as Senate Majority Leader Harry Reid said he’s hopeful a last-minute U.S. deficit-reduction deal will be reached to protect all but top earners from a tax increase.

The yen weakened 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. in New York, said in a telephone interview. “That should broadly weigh on the dollar.”

The dollar gained 0.2 percent to $1.3187 per euro at 12:05 p.m. New York time. The U.S. currency appreciated 0.7 percent to 86.55 yen after rising to 86.64 yen on Dec. 28, the strongest since Aug. 3, 2010. The yen lost 0.5 percent to 114.17 per euro.

Real Falls

The Brazilian real has declined 8.9 percent versus the dollar in 2012, losing the most after the 11 percent decline for the yen. The South Korean won was the biggest winner, adding 8.3 percent.

The 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 4.9 percent.

Reid said the Senate will resume work today.

“They’re progressing,” 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.

“The medium-term impact is dollar negative,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia 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.”

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