Dollar Drops as Fiscal-Cliff Negotiations Go Public; Euro Gains

The dollar declined for a second day against the euro as U.S. lawmakers publicly wrangled over the spending cuts and tax increases of the so-called fiscal cliff.

The greenback was mixed against higher-yielding currencies after a report showed the U.S. economy grew more than previously estimated in the third quarter and House Speaker John Boehner said “no substantive progress” was made in budget talks. The euro gained against the majority of its 16 most-traded peers as Italy’s benchmark bonds rose for a third day as borrowing costs declined at a debt auction. Sweden’s krona weakened after the economy expanded at a slower pace last quarter.

“You can’t get too caught up in the headlines,” said Greg Anderson, the North American head of G-10 currency strategy at Citigroup Inc. in New York. “Often when you get the very closest to a deal is when you get most aggressive in negotiating strategy, because you’re comfortable you have a fall-back position that you can accept”

The dollar dropped 0.2 percent to $1.2979 per euro at 5 p.m. New York time after falling as much as 0.5 percent. It is down 0.1 percent in November. The single currency traded 0.3 percent higher at 106.58 yen and has climbed 3.1 percent this month. The yen declined 0.1 percent to 82.12 per dollar and is down 2.9 percent this month.

The MSCI World Index rose 0.8 percent, with the Standard & Poor’s 500 Index climbing 0.4 percent.

Krona, Shekel

The krona extended its weekly decline as Statistics Sweden said GDP expanded a seasonally adjusted 0.5 percent, compared with growth of 0.7 percent the prior quarter. Economists surveyed by Bloomberg News forecast growth of 0.2 percent. Annual growth slowed to 0.7 percent from 1.3 percent, the agency said.

Sweden’s currency dropped 0.3 percent to 6.6657 per dollar and is down 0.6 percent this week.

Israel’s shekel jumped to the strongest level in more than a month as investors sought riskier assets amid optimism U.S. lawmakers will reach an agreement to avert the so-called fiscal cliff.

The shekel rose as much as 0.8 percent to 3.8138 per dollar, the strongest intraday level since Oct. 23, before paring to 3.8218 and a 0.6 percent gain.

China’s yuan fell as the central bank cut the reference rate to a level that forces a retreat for a second day, fueling speculation policy makers are seeking to curb gains after the currency reached a 19-year high this week.

The People’s Bank of China weakened the fixing by 0.01 percent to 6.2910 per dollar, 1.01 percent below yesterday’s closing level in the spot market. The yuan is allowed to fluctuate a maximum 1 percent on either side of the fixing.

Bond Yields

Further gains in the shared currency may be limited as the seven-day relative strength index versus the dollar rose to 73. A reading higher than 70 indicates a currency’s rally may have been too far, too fast and may be due for a correction.

Italian 10-year bond yields declined to the least in two years while Spain’s similar-maturity bond yield touched the lowest level in eight months, signaling the debt crisis that has weighed on the shared currency since 2010 may be easing.

The euro has fallen 2 percent this year, according to Bloomberg Correlation Weighted Indexes, which track 10 developed-nation currencies. The dollar is down 2.2 percent and the yen dropped 9 percent to lead decliners.

Boehner ‘Tactic’

The dollar briefly erased losses against the euro after Boehner’s comments. Senate Majority Leader Harry Reid said later that Democrats were all on the same page on the budget talks and Senator Chuck Schumer said there has been progress. House Democratic Leader Nancy Pelosi said Boehner’s comments were a “tactic.”

The Dollar Index fell for a second day as U.S. gross domestic product grew at a 2.7 percent annual rate, up from a 2 percent prior estimate, revised figures from the Commerce Department showed today. The gauge dropped 0.2 percent 80.210.

“It’s very hard right now to play the headline risk in foreign exchange,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “We’re going to get conflicting comments, with a deal eventually getting done, which would be positive for risk.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE