Dollar gains as debt worries clip euro

Dollar gains as debt worries clip euro
NEW YORK (MarketWatch) — The U.S. dollar extended gains against the euro and other currencies on Tuesday as investors turned their attention back to sovereign debt problems among some euro zone members, which some analysts said could eventually trump expectations for rising interest rates in the region.

“We remain concerned about the political paralysis in Europe that will prevent a truly comprehensive plan to deal the European debt crisis,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

The dollar remained higher after crude’s decline appeared to push traders to pare bets that the dollar will keep falling, wrote strategists at RBC Capital Markets. Bets against the dollar have reached extreme levels recently.
The dollar index /quotes/comstock/11j!i:dxy0 (DXY 76.79, +0.29, +0.38%) , which measures the U.S. unit against six currencies, rose to 76.796, up from 76.488 in North American trade late Monday.

The euro /quotes/comstock/21o!x:seurusd (EURUSD 1.3903, +0.0003, +0.0216%) briefly dipped under $1.39. It recently traded at $1.3905, down from $1.3972 in late North American trading Monday.

The British pound /quotes/comstock/21o!x:sgbpusd (GBPUSD 1.6160, +0.0002, +0.0124%) slipped to $1.6159 from $1.6205 Monday. See real-time currency quotes and tools.

Against the Japanese yen, the dollar /quotes/comstock/21o!x:susdjpy (USDYEN 82.6700, +0.0300, +0.0363%) rose to ¥82.66, up from ¥82.28 late Monday. Rising U.S. yields tend to support the dollar versus the yen. Read story on U.S. Treasury yields.

Yields on Portuguese and Irish debt rose to a record Tuesday, analysts said. Greater difficulties in these countries funding themselves could keep leave bulls reluctant to press the 17-nation shared currency above $1.40, strategists said.

The next key event about peripheral countries debt problems is on March 11, when heads of state of euro-zone nations will meet.

The euro has recently shrugged off fiscal problems on the periphery of the euro zone on expectations that politicians will reach agreement to overhaul the region’s rescue fund and fiscal reforms, said Jane Foley, senior currency strategist at Rabobank.

Those expectations jumped last week after European Central Bank President Jean-Claude Trichet signaled that interest rates could soon rise.
“This may be so, but there are no guarantees that this will be achieved without some haircuts for some bond holders; Germany is, after all, playing hard ball,” she said.

While the U.S. is battling fiscal problems that could weigh heavily on the greenback over the medium term, the euro could suffer a near-term pullback or some consolidation, Foley said.

Others say the euro is destined to fall further, not only because of doubts about Europe’s ability to come up with a long-term plan for debt-laden counties.
Oil and the Fed

By June, the U.S. Federal Reserve will finish its bond-buying program, which has weighed on the dollar for several months, noted David Woo, currency and rates strategist at Bank of America Merrill Lynch. Many have dubbed that program a second round of quantitative easing, or QE2.

“The end of QE2 in June, the uncertainty around the Chinese inflation and policy outlook, and the low likelihood of a market friendly overhaul of [Europe’s bailout plan] at the end of March, should given the dollar a leg up in the second quarter, before the U.S. fiscal challenge catches up with the greenback,” Woo wrote in a report.

The firm expects the euro to fall to $1.25 by June, revised up from a previous forecast for it to fall to $1.20.

The firm also expects the ECB to raise rates four times this year, beginning in April. Brent oil prices will rise to $135 a barrel, this quarter, then decline in the second half of the year to about $94 a barrel, according to Bank of America analysts.

Brent crude traded around $113 a barrel on Tuesday. Read more ways to profit from higher oil.

The dollar also benefited as oil prices pulled back from 29-month highs on media reports that Libyan leader Moammar Gadhafi may be looking for a way to flee the country. Also easing oil prices, several countries may move to boost crude production, according to reports.

Nymex crude oil for April delivery fell to around $105 a barrel. Read about Gadhafi and oil futures.

The euro been gaining when oil rises because a higher risk of inflation from commodity prices makes traders more hopeful that the ECB would raise interest rates which supports the euro.

The dollar has tended to fall when oil rallies because of worries weighing on U.S. growth, which will keep the Fed from tightening its monetary policy stance.

Deborah Levine is a MarketWatch reporter, based in New York. William L. Watts in London and Lisa Twaronite in Tokyo contributed to this report.