FOREX-Dollar drops as U.S. deficit fears return to the fore

* Euro rises on risk appetite, euro zone hopes

* Euro zone debt concerns cloud outlook

* Traders say LatAm, East Europeans favoring euro

* No rate hike in China stokes risk appetite
(Recasts; updates prices, adds details, comment)

NEW YORK, Dec 13 (BestGrowthStock) – U.S. deficit concerns returned
to the forefront of foreign exchange trading on Monday, pushing
the dollar lower after Moody’s said a tax-cut deal reached last
week by the White House and Republicans could shift its outlook
on the United States’ top credit rating.

A U.S. tax cut deal could swell the budget deficit at a
time when the Federal Reserve is committed to accommodative
monetary policy. [ID:nN13291856]

U.S. trade and budget deficit concerns have traditionally
worried investors but they have been overshadowed in recent
years by the collapse of the housing market, bad mortgages and
their weight on the banking and financial system.

Now, as the economy appears to be recovering, investor
focus has shifted back to the budget deficit.

“This move is coming as the market starts to price in the
impact of the tax cut deal, and while Moody’s saying it
increases the chances of a negative outlook on U.S. ratings
isn’t new, traders can’t help but contemplate the ‘what if’
scenario,” said Paresh Upadhyaya, head of Americas G10 strategy
at BofA Merrill Lynch.

The budget concerns follow a rise in U.S bond yields that
began last week, with the 10-year yield hitting a six-month
high, though important support levels held so far on Monday.

The euro was up 1.4 percent at $1.3418 (EUR=: ), while the
dollar fell 1.5 percent against the Swiss franc to 0.9653
francs (CHF=: ), a typical safe haven. The dollar also fell
against the yen, down 0.9 percent to 83.18 yen (JPY=: ).

HOLIDAYS APPROACH

Volume was lower than usual as the holidays approached, and
traders said the euro could run into resistance. Some said the
market was wary of getting stretched ahead of a European Union
summit this week that some hope will result in a permanent
support mechanism for troubled euro zone countries.

The euro’s rise pushed the single currency back through the
38.2 percent retracement of the move from June to November, but
three-month risk reversals hinted at euro weakness.

Three-month euro/dollar risk reversal was at -2.101 on
Monday, according to Reuters data, with a bias to euro puts and
dollar calls. A negative risk reversal shows greater demand for
put options relative to calls and shows more options players
betting the currency will fall than rise.

But the focus Monday was squarely on U.S. tax cuts.

While the tax cut deal has led many economists to upgrade
their U.S. growth forecasts and boosted equities, traders say
the rise in U.S. yields was also driven by debt worries.

Michael Woolfolk, currency strategist at BNY Mellon, said
markets are confident the deal will indeed boost growth, and
that helped lift the dollar last week.

But he said they also fear that with unemployment near 10
percent, the U.S. central bank will nonetheless press on with a
$600 billion bond-buying program to keep long-term rates low.
That, together with tax cuts, may swell a budget deficit
already in excess of $1 trillion.

“You may see growth in the 3-4 percent area next year, but
that will cause inflation.” he said. “And it’s going to take an
act of God to get the Fed to trim its bond buying. That’s what
people are concerned about.”

The Fed holds its last policy meeting of the year on
Tuesday.

The EU’s two-day summit begins on Thursday, and leaders are
expected to tweak the EU treaty, paving the way to create a
European Stability Mechanism from 2013, when a temporary
mechanism expires.
(Reporting by Nick Olivari and Steven C Johnson; Editing by
Leslie Adler)

FOREX-Dollar drops as U.S. deficit fears return to the fore