Euro Erases Gain as Ireland Budget Vote Doesn't Ease Investors's Concerns

The euro fell from near a two-week high against the dollar as Ireland’s parliament neared a vote on austerity measures that are required for the nation to qualify for an 85 billion-euro ($113 billion) aid package.

Ireland’s Finance Minister Brian Lenihan said the goverment has an “absolute majority” to pass the budget as European leaders continue to discuss how to contain the region’s debt crisis from spreading to other nations. The dollar weakened earlier after President Barack Obama broke a stalemate about extending middle-class tax cuts introduced by the administration of George W. Bush. The yen fell from a three-week high against the dollar as Japan’s finance minister said he will keep a “close eye” on the nation’s currency as its recent increase is “one-sided.”

The Irish budget’s “immediate ability to impact the euro seems to have diminished,” said Robert Lynch, head of currency strategy for HSBC Holdings Plc in New York. “The broader issues aren’t even close to being resolved.”

The euro fell 0.1 percent to $1.3293 at 2.31 p.m. in New York, from $1.3308 yesterday, after rising as much as 0.7 percent. The yen weakened 1 percent to 83.48 per dollar from 82.66 and the Japanese currency traded at 110.96 from 110 yesterday.

Irish Vote

Ireland’s parliament will vote on its budget around 7 p.m. in Dublin. The budget must be passed for an 85 billion-euro aid package to go into effect. The government was forecast to win approval for austerity measures after independent lawmaker Michael Lowry said late yesterday he will support the budget.

The euro has declined 9.2 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar is down 1.6 percent, while the yen has gained 11.5 percent.

International Monetary Fund Managing Director Dominique Strauss-Kahn said the European Union needs to find a “comprehensive” solution to its debt crisis and not rely on a “case-by-case” method.

“It’s not a good solution to find a solution for every country,” Strauss-Kahn said at a press conference in Athens. The crisis in the U.S. “started with certain banks, then we had another bank, and then another and then Lehman Brothers and we repeatedly said to the U.S. government that this case-by-case approach is not a good one,” he said.

U.S. Fiscal Policy

Obama said he would accept lower tax rates on high earners’ income, dividends, capital gains and multimillion dollar estates for the next two years in exchange for extending federal unemployment insurance. The current tax rates, enacted in 2001 and 2003, are set to increase Dec. 31.

The increase in taxes may further widen the budget deficit, said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York.

“These kinds of agreements ultimately don’t support the idea of fiscal consolidation,” Ruskin said. “That’s a point of particular caution.”

The U.S. reported on Oct. 15 its second-largest annual budget deficit, $1.29 trillion, for the fiscal year ended Sept. 30.

Dollar Tracker

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, gained 0.2 percent after falling as much as 0.5 percent.

The yen strengthened 1.3 percent so far this month versus the greenback as of yesterday, prompting Japan’s finance minister to warn about the currency’s rise.

“The yen’s movement has become one-sided again today and yesterday,” Yoshihiko Noda said at a news conference in Tokyo today. “I have to keep a close eye” on the markets, he said.

The yen earlier strengthened against the dollar and euro. Noda ordered selling of more than 2 trillion yen ($24 billion) on Sept. 15 in an attempt to stem the currency’s gains. The yen has appreciated 3.1 percent since then.

Canada’s dollar dropped, erasing earlier gains, after the Bank of Canada held the benchmark interest rate steady at 1 percent. It said it will remain careful about future interest- rate increases as falling exports and Europe’s sovereign debt crisis hinder the economic recovery.

The currency, known as the loonie, fell 0.3 percent to C$1.0088 per U.S. dollar.

The pound rose against the dollar after U.K. manufacturing expanded twice as much as economists forecast in October and retail sales climbed, boosting demand for British assets. Sterling appreciated 0.4 percent to $1.5780, the strongest since Nov. 24.

Investors should bet the pound will rise against the dollar, euro and yen in 2011, according to Nomura Holdings Inc.

Great Britain’s currency, which has fallen 20 percent against the dollar since 2007, is set to rebound as the likelihood lessens Bank of England policy makers will follow the U.S. central bank in buying government debt, or so-called quantitative easing, Nomura Holdings said. The company has invested the pound against a basket equally weighted in euro, dollar and yen.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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