Yen, Dollar Weaken as U.S. Budget Accord Damps Demand for Refuge

The yen and dollar weakened against higher-yielding counterparts after U.S. lawmakers passed a bill undoing income-tax increases, helping avoid the so-called fiscal cliff and damping demand for refuge assets.

The U.S. currency fell versus most major peers even as Republicans vowed to fight President Barack Obama for spending cuts in exchange for raising the debt ceiling. A gauge of volatility dropped the most since June. The Australian and New Zealand dollars rallied, while the yen slid beyond 87 per dollar for the first time since July 2010 after Japanese Prime Minister Shinzo Abe reiterated his goal to weaken the currency.

“We had the big tail risk of U.S. recession in the first quarter, which has been removed,” Greg Anderson, the North American head of Group of 10 currency strategy at Citigroup Inc. in New York, said in a telephone interview. “That helped risk sentiment and should help risk assets going forward. However, there are still questions out there about U.S. policy.”

The yen depreciated 0.6 percent to 115.17 per euro at 5 p.m. New York time. It touched 115.99, the weakest since July 8, 2011. Japan’s currency lost 0.7 percent to 87.34 per dollar and reached 87.35, the weakest level since July 29, 2010.

The 17-nation euro fell 0.1 percent to $1.3186 after climbing earlier to a two-week high of $1.33.

“The euphoria of the deal may already be wearing off,” Neal Gilbert, a market strategist at GFT Markets, wrote yesterday in a note to clients. “A fiscal-cliff deal really isn’t done yet. It has just been suspended to allow more time to talk about it.”

Aussie, Kiwi

The Australian dollar touched its highest level in two weeks. It strengthened 1.1 percent to $1.0504 and touched $1.0524, the highest level since Dec. 19.

New Zealand’s dollar, nicknamed the kiwi, rose 0.8 percent to 83.41 U.S. cents after increasing as much as 1.5 percent, the most since July 26.

Mexico’s peso climbed 1.1 percent to 12.7465 to the greenback, and Brazil’s real gained for the first time in three days, advancing 0.3 percent to 2.0457 per dollar. The real touched 2.0329, the strongest level since Nov. 8.

The Brazilian currency declined 9 percent versus the dollar in 2012, losing the most after an 11 percent decline by the yen. Mexico’s peso was the biggest winner, adding 8.4 percent.

“The move today is really all about the fiscal cliff,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “The reaction seems to be a very classic risk-positive move.”

Volatility Drops

The implied volatility of three-month options for Group of Seven currencies fell as much as 56 basis points, or 0.56 percentage point, to 7.64 percent, the biggest decline since June 18, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark interest rates more attractive as the risk in such trades is that market moves will erase profits.

The Standard & Poor’s 500 Index climbed 2.5 percent.

Obama said he’ll sign the bill passed by Congress that makes the George W. Bush-era income-tax cuts permanent for most workers while letting them expire for top earners. The deal averted $600 billion in automatic tax boosts and spending cuts that were to start taking effect this month, which the Congressional Budget Office said might lead to a recession.

Debt Ceiling

The budget deal left the issue of spending cuts unresolved. Lawmakers also must deal with the U.S. debt ceiling, which reached its $16.4 trillion limit on Dec. 31.

The accord won’t reduce U.S. deficits enough to avoid a credit-rating downgrade, Moody’s Investors Service said.

The ratio of government debt to gross domestic product will likely peak at about 80 percent in 2014 and may stay at about that level for the rest of the decade, New York-based Moody’s said today in a statement. Further measures are needed to support the nation’s top Aaa rating, the company said.

S&P cut its U.S. rating one step to AA+ on Aug. 5, 2011, with a negative outlook. The dollar has strengthened 6.9 percent versus the euro and 11 percent against the yen since then. S&P said today the budget deal doesn’t affect its view.

The yen tumbled today after Japan’s Abe said in a New Year statement yesterday that the most urgent issue for his country was to break out of currency appreciation and deflation. “Bold” monetary policy is one of the three prongs of his economic measures, he said.

The prime minister has called on the Bank of Japan to undertake unlimited money printing to spur growth and achieve inflation of 2 percent, twice the BOJ’s target. The central bank will hold its first policy meeting this year Jan. 21-22.

The yen and the dollar were the biggest losers over the past six months among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The Japanese currency tumbled 13 percent, and the greenback declined 3.5 percent. The Norwegian krone led all gainers with a 4.6 percent increase, and the euro rose 1.5 percent.

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