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Euro retreats after hitting 3-week high; Fed on tap

Australian dollar breaks parity with greenback
NEW YORK: The euro hit a three-week high against the dollar on Tuesday but gave up gains as US bond yields edged higher and investors squared positions ahead of the last Federal Reserve meeting of the year.
After long-dated US yields rose following President Barack Obama’s deal last week to extend US tax cuts for all earners, traders said the market will watch closely for any sign the Fed could speed up or alter a $600 billion bond-buying program designed to push long-term interest rates lower.
“The Fed could be interesting depending on how vocal they are in either committing to the full amount now that they’ve got additional fiscal stimulus or whether they feel they have to step on the gas to get rates back down,” said Brian Dolan, chief strategist at in Bedminster, New Jersey.
Dolan said the euro, which began the week at $1.32 and hit a three-week high near $1.35 overnight, could rally further if it closes above $1.3450, with a move to $1.37 possible.
But traders said that would likely require the Fed to sound an aggressive note on its easing program. Markets expect the Fed to reaffirm its current policy when it ends its meeting at around at 1915 GMT while acknowledging improved economic data.
The euro was last changing hands at $1.3385, unchanged on the day. Earlier, it hit a three-week high of $1.3498 after breaking $1.3475, the 38.2 per cent retracement of its November decline,
The Australian dollar hit a one-month high above parity with the greenback as oil prices rose but eased to $0.9970, while the dollar was unchanged at 83.45 yen.
Traders also said year-end positioning and low trading volume as exaggerating some price swings.
Data Tuesday showed US retail sales rose by more than expected in November, suggesting US growth is gaining traction.
The tax cut deal, agreed to last week by President Barack Obama and congressional Republicans, has prompted economists to upgrade their US growth forecasts, but it also pushed up bond yields for fear it will swell the US deficit.
The dollar rose with yields last week but fell on Monday when Moody’s warned the tax cuts could move it a step closer to cutting the US triple-A credit rating.
Some strategists said fear of imminent US inflation and higher long-term rates was premature.
The euro also hit a three-week high against the yen, shrugging off the weaker-than-forecast current conditions element of the German ZEW survey.
But it fell after the S&P rating agency said Belgium’s sovereign debt could be downgraded within six months, reminding investors of contagion risks from the euro-zone crisis. -Reuters


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