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Yen, Dollar Advance as U.S. House Delay Boosts Demand

The yen and the dollar strengthened as investors sought perceived safety on concern U.S. deficit- reduction talks will fail to avert the so-called fiscal cliff that threatens to push the economy into a recession.

The 17-nation euro pared a weekly advance versus the greenback after House Republican leaders canceled a scheduled vote on Speaker John Boehner’s plan to allow higher tax rates for annual incomes above $1 million. The shared currency declined the most in two weeks as Italian Prime Minister Mario Monti resigned, clearing the way for elections that will focus on his crisis-fighting austerity policies. The New Zealand dollar led declines in higher-yielding currencies.

“Investors are still nervous about the fiscal cliff and what the outcome will be,” said Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “That the plan couldn’t pass the house was kind of a reminder to the market that we’re not at a solution yet.”

The yen strengthened against all its major counterparts, appreciating 0.6 percent to 111.08 per euro at 5 p.m. New York time. The dollar added 0.4 percent to $1.3188 per euro. It weakened 0.2 percent to 84.24 yen.

Futures Bets

Futures traders cuts bets that the euro will decline against the dollar to the least since September 2011, figures from the Commodity Futures Trading Commission show. Net shorts were 9,736 on Dec. 18, compared with net shorts of 31,623 a week earlier.

Bets the yen will decline against dollar decreased from the most since 2007. Future traders pared net-short yen positions to 89,163 contracts on Dec. 18 from 94,401 the previous week.

The South African rand leads all major currencies this month against the greenback, appreciating 3.7 percent. The yen has fallen the most out of 16 counterparts versus the dollar, decreasing 2.1 percent.

South Korea’s won has appreciated more than all of its peers versus the dollar this quarter, adding 3.5 percent. The Norwegian krone has been the second-biggest gainer, increasing 2.7 percent.

The Brazilian real has lost 10.2 percent versus the dollar in 2012, while the yen has declined 8.7 percent. The Mexican peso leads all 16 of the dollar’s biggest peers with a gain of 7.8 percent.

Price Swings

Implied volatility, which signals the expected pace of currency swings, for the currencies of Group of Seven nations was at 7.79 percent, after reaching 7.09 percent on Dec. 17, its lowest closing level since July 2007, according to a JPMorgan Chase & Co. index. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profit.

Political leaders in Washington are debating how to avoid the so-called fiscal cliff, the more than $600 billion in automatic tax increases and spending cuts that will take effect in January unless Congress acts.

Boehner, an Ohio Republican, said in a statement yesterday his tax measure “did not have sufficient support from our members to pass.” A House leadership announcement said the chamber will hold no more votes until after the Christmas holiday and will return “when needed.”

Budget Talks

The speaker said he will call President Barack Obama, according to Representative Steven LaTourette of Ohio.

Australia’s currency slid as much as 0.8 percent to the least since Dec. 3, while New Zealand’s dropped 1.3 percent to 82.27 U.S. cents.

The Standard & Poor’s 500 Index slid 0.9 percent.

“We’ve seen the more sensitive risk currencies get hit,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said in a telephone interview. “To actually get an agreement with the Democrats and Obama is going to take more time and add more uncertainty around the fiscal cliff.”

Ending a 13-month tenure, Monti submitted his resignation to Italian President Giorgio Napolitano, according to a statement from the president’s office. Monti stepped down after lawmakers passed a 2013 budget law. The president has suggested Feb. 24 as the date for elections.

Italy Watch

“His departure is something that’s going to weigh on the euro,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York, said in a telephone interview. “He’s done a good job as prime minister in terms of trying to implement austerity measures and get the fiscal house in order there.”

Even as the U.S. budget talks stall, the yen is still headed for a weekly decline against most of its 16 major peers.

The Bank of Japan (8301) yesterday increased its asset-purchase fund to 76 trillion yen ($900 billion) from 66 trillion yen and kept its inflation target at 1 percent, while saying it will discuss “medium- to long-term price stability” at its meeting in January.

Incoming Japanese Prime Minister Shinzo Abe has called for a doubling of the central bank’s inflation goal to 2 percent and unlimited easing to revive growth.

“Yen selling has been picking up in a short period of time,” said Yoshitsugu Fujita, assistant vice president of global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “In the medium term, Abe’s ability to deliver his pledge on monetary and fiscal stimulus will remain a focus for markets.”

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

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