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

Fiscal Cliff

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.”

Yen Slump

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.

Bloomberg News

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