Bloomberg News

Dollar Gains Versus Yen as Obama Endorses Deficit-Cutting Plan

July 19, 2011

July 19 (Bloomberg) -- The dollar rose versus the yen for the first time in three days as President Barack Obama endorsed deficit-cutting measures proposed by a bipartisan group of senators, easing concern the U.S. is moving closer to default.

The U.S. currency pared its drop against the euro as Obama called the revival of the so-called Gang of Six proposal “good news.” The euro earlier reduced gains as Germany’s Chancellor Angela Merkel said debt turmoil can’t be resolved in one step and the International Monetary Fund said the Greek crisis risks infecting the rest of the euro zone.

“The talk of the Gang of Six coming together and maybe helping facilitate some agreement on the debt ceiling, possible fiscal adjustments, that’s really been the catalyst for this move,” said Alan Ruskin, global head of Group of 10 currency strategy at Deutsche Bank AG in New York. “It’s a squeeze of any dollar short positions. The dollar is coming back across the board.” A short is a bet a currency may decline.

The dollar appreciated 0.2 percent to 79.18 yen at 5 p.m. in New York, from 79.04 yesterday, after falling as much as 0.3 percent. The euro increased 0.3 percent to $1.4156, from $1.4112, after advancing as much as 0.7 percent. The 17-nation currency rose 0.5 percent to 112.07 yen, from 111.55.

Currencies of commodity-exporting countries rallied as stocks and crude oil advanced. New Zealand’s dollar rose against all of its 16 major counterparts tracked by Bloomberg, advancing as much as 1.5 percent to a record 85.73 U.S. cents. Australia’s dollar gained 1.2 percent to $1.0733.

Gain in Stocks

The Standard & Poor’s 500 Index advanced 1.6 percent, while crude oil for August delivery increased 2.2 percent to $98.05 a barrel. A rally in Treasuries pushed yields on 10-year notes down five basis points to 2.88 percent.

The Swiss franc, a haven in times of financial turmoil, weakened against all of its major counterparts, sliding 1.1 percent to 1.1664 versus the euro after appreciating yesterday to a record 1.1374. The currency declined 0.8 percent to 82.41 centimes per dollar after gaining yesterday to a record 80.33.

Obama said the revival of the Gang of Six plan may help speed up negotiations on the deficit and raising the federal debt ceiling. He pledged yesterday to veto a Republican proposal to impose mandatory budget cuts. The government says it has until Aug. 2 before its ability to pay its debt expires.

European Summit

European Union leaders are preparing for a summit on July 21 to hammer out a solution to the Greek debt crisis, which pushed the euro to $1.3837 last week, the lowest since March.

Merkel’s comments damped expectations that government leaders can make progress on the region’s debt problems at this week’s summit.

“Those who want to take political responsibility, and that’s what the government wants and takes seriously, know that responsibly there won’t be one spectacular step” this week, Merkel told reporters in Hanover, Germany, today. “It’s entirely about creating a controlled, composed process of gradual steps and measures.”

Policy makers are divided on how to prod investors into financing a new Greek bailout package and whether the euro area should issue euro bonds to help debt-laden nations tap markets.

Europe’s leaders have failed to convince investors that they are capable of resolving Greece’s debt crisis, running the risk of derailing the global recovery, the IMF said in a statement released today.

IMF View

Greece’s problems risk infecting the rest of the euro region even if officials avert a default, threatening the global economic recovery, the IMF said.

“The IMF is taking a very independent view, and it does not want to be seen as complicit in any type of rubber-stamping approval of a bailout of the peripheral members,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration.

The euro gained earlier against the dollar after Greek Finance Minister Evangelos Venizelos said negotiations over a second bailout package for Greece should be “positive for the viability of the public debt” and safeguard the nation’s banking system. The aim is to avoid even a selective default on the nation’s debt, he said in an interview, according to an e- mailed statement today from the Athens-based Finance Ministry. He said a resolution of debt turmoil is attainable.

The Canadian dollar appreciated as much as 1.2 percent to 94.82 versus the U.S. currency, the strongest level since May 3. The Bank of Canada kept its target rate for overnight loans between commercial banks at 1 percent and said borrowing costs will increase as the economy recovers. Policy makers dropped the word “eventually” to describe the timing of their next move.

--With assistance from Allison Bennett in New York. Editors: Dennis Fitzgerald, Paul Cox

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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