Dollar Gains as U.S. Yields Soar, Adding Appeal to U.S. Assets

The dollar rose against most of its major counterparts as Treasury yields surged on speculation an agreement to extend tax cuts will boost the economy, increasing demand for U.S. assets.

The greenback rallied against the euro and the yen after President Barack Obama broke a stalemate about extending middle-class tax cuts introduced by the administration of George W. Bush. The euro fell from near a two-week high against the dollar on speculation the region’s financial crisis won’t be solved by Ireland’s parliament passing austerity measures required for an 85 billion-euro ($113 billion) aid package.

“Currencies always take their cues from bond yields when you see big moves,” said Kathy Lien, director of currency research with online currency trader GFT Forex in New York. “We hadn’t seen this large an increase in a long time.”

The dollar added 1 percent to 83.49 yen at 5 p.m. in New York, from 82.66 yen yesterday. The euro fell 0.4 percent to $1.3261, from $1.3308 yesterday, after rising as much as 0.7 percent.

The benchmark 10-year Treasury note yield climbed 21 basis points, or 0.21 percentage point, to 3.13 percent, the highest since June, according to BGCantor Market Data. Two-year note yields gained 11 basis points to 0.53 percent in the biggest gain on a closing basis since March 24.

Tax Deal

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

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.

Irish Vote

Irish Finance Minister Brian Lenihan said the government has an “absolute majority” to pass the budget. Speaking to reporters in Dublin, he said the government had won the first ballot, on voting procedure. The budget must be passed for an 85 billion-euro aid package to go into effect. Lenihan said European leaders need to take measures to address market concerns.

“I don’t think any further interventions are required in Ireland,” Lenihan said at a press conference in Dublin after presenting the 2011 budget. “As far as the European position is concerned, it’s clear that there’s a degree of disturbance that requires a European response.”

The euro has declined 9.4 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar is down 1.1 percent, while the yen has gained 11.4 percent.

‘Comprehensive’ Solution

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.

Japan’s finance minister said he will keep a “close eye” on the nation’s currency as its recent increase is “one-sided.” The yen had 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.

Yen Pattern

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 2.6 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 0.7 percent to C$1.0124 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 0.3 percent to $1.5759, 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.

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