The dollar gained to its strongest level in almost three weeks against the euro on speculation U.S. policy makers will struggle to reach agreement on raising the nation’s debt limit, underpinning demand for the safest assets.
Japan’s yen rose against all its 16 most-traded peers amid concern the U.S. Treasury will exhaust what it called “extraordinary” measures to keep funding the government by late February or early March after the nation hit its $16.4 trillion debt ceiling on Dec. 31. The dollar rose the most versus the higher-yielding South African rand after the International Monetary Fund said yesterday the U.S. ought to raise the debt ceiling “expeditiously.”
“We’ve pulled back a bit, which isn’t too surprising after a big rally like yesterday,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said in a telephone interview. “Yesterday the tail risk was removed, but we still have smaller risks ahead, like the debt limit. It’s a normal adjustment.”
The dollar advanced 0.6 percent to $1.3108 per euro at 8:58 a.m. New York time and reached $1.3082, the strongest level since Dec. 14. The yen rose 1.1 percent to 113.91 per euro. Japan’s currency gained 0.5 percent to 86.92 per dollar after depreciating to 87.36, the weakest since July 2010.
The U.S. currency will strengthen to $1.19 per euro by year-end, said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London. That compares with a median estimate of $1.27, based on analyst forecasts compiled by Bloomberg.
“All the way through the first few months of the year it will be fiscal policy and monetary policy which are at the forefront of people’s minds,” Robson said. “There was a risk of some pullback” after the dollar initially weakened yesterday, he said.
The South African rand declined the most out of its 16 most-traded peers as concern over the U.S. debt ceiling damped demand for riskier assets. It fell 1.1 percent to 8.5792 per dollar after reaching 8.5971, its lowest level in over a week.
South Korea’s won increased versus all of its peers except the yen. It gained 0.2 percent to 1,061.65 per dollar and touched 1,061.64, its strongest level since Sept. 2, 2011.
The Danish krone slipped 0.6 percent to 5.6914 per dollar and reached 5.7023, its weakest level since Dec. 14. Switzerland’s franc dropped 0.5 percent to 92.28 centimes per dollar.
The Brazilian real declined 9 percent versus the dollar in 2012, losing the most after an 11 percent decline by the yen. Mexico’s peso was the biggest winner, adding 8.4 percent.
The dollar weakened as much as 0.8 percent against the euro yesterday after the U.S. Congress passed a bill on Jan. 1 making income-tax cuts started under President George W. Bush permanent for most workers, while reductions in the rates for top earners will expire. That averted $600 billion in immediate tax increases and spending cuts, known as the fiscal cliff, which risked pushing the U.S. economy into a recession.
The IMF said in a statement yesterday that “the economic recovery would have been derailed” without the action by the U.S. Congress.
“Yesterday, we called a peak in risk appetite,” Morgan Stanley analysts led by London-based head of foreign-exchange strategy Hans Redeker wrote today in a report to clients. This represents “a significant change to the strategy we used in the second half of last year, when we traded currencies from a risk- bullish angle. The compromise achieved on New Year’s Day suggests that polarity between U.S. political parties has grown. The U.S. fiscal cliff agreement has only postponed deadlines to February.”
The yen’s advance trimmed its slump in the past three months to 12 percent, according to Bloomberg Correlation- Weighted Indexes, which track 10 developed-nation currencies. The dollar dropped 1 percent in the period and the euro gained 0.7 percent.
Companies in the U.S. added 215,000 workers in December, up from an 118,000 gain in the previous month, ADP Research Institute said. The median forecast of 36 economists surveyed by Bloomberg called for an advance of 140,000. A government report tomorrow will show nonfarm payrolls rose by 150,000 workers last month, versus 146,000 in November, a separate survey showed.