Dollar advances to 3-week high vs. euro on debt-limit concern

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.

Policy Concern

“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.

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