FOREX-Euro up on Ireland optimism, U.S tax cut extension

* Euro rises on Irish budget passage expectations

* U.S. tax cut extension seen dampening dollar outlook

* Support for euro seen as fleeting as weaknesses remain

(Updates prices, adds quotes, changes byline)

By Julie Haviv

NEW YORK, Dec 7 (BestGrowthStock) – The euro climbed against the
dollar on Tuesday on expectations that Ireland will pass an
austerity budget later in the day, but the single currency’s
strength will likely be transitory as structural weaknesses in
the euro zone persist.

The euro remained vulnerable after euro zone policymakers
failed to come up with new policies to tackle the region’s debt
crisis. But an Irish Times report suggesting Dublin would pass
an austere budget on Tuesday supported cautious investor
optimism. For more, see [ID:nLDE6B51VW] [ID:nLDE6B60DA]

News that U.S. President Barack Obama reached an agreement
to extend the Bush tax cuts for another two years lifted stocks
and buoyed risk appetite. [ID:nN06211347]

Foreign exchange strategists, however, view it as dampening
the dollar. While the plan could spur better U.S. growth, it is
funded through debt and the cost to the fiscal deficit is
expected to be significant, and therefore it is seen as another
weight on the dollar.

“The likelihood that the Irish budget will pass and the
extension of U.S. tax cuts are working together to boost risk
appetite, which should last for the next few days but then
dissipate,” said Mark McCormick, currency strategist at Brown
Brothers Harriman in New York.

In early New York trading, the euro (EUR=: ) was 0.6 percent
higher at $1.3387, after rising to $1.3397. Traders said strong
demand from a UK clearer and Middle East accounts helped it to
rally in European trade.

“The favorable news events we have going on right now are
positive for the euro and are overshadowing the risk that China
might implement a rate cut over the weekend,” he said.

The official Chinese Securities Journal reported China’s
central bank may raise interest rates this weekend to enshrine
its shift to a “prudent” monetary policy in the face of rising
inflation. [ID:nTOE6B6003]

Such speculation was offset somewhat after China’s key
short-term money market rate plunged from two-year highs. Big
banks had previously been locking up large amounts of cash on
expectations of a further increase in reserve requirements in
coming weeks and more policy tightening next year, causing the
benchmark seven-day repo rate to soar. [ID:nTOE6B6058]


Take a Look on euro zone debt crisis: [ID:nLDE68T0MG]

Scenarios on euro zone crisis: [ID:nLDE6B50PA]

Graphics package on Europe’s struggle with debt:

PDF on yuan offshore market:

“The favorable news events are buying the euro some time,
but concerns over the euro are not going away as it is not a
liquidity issue but rather a solvency issue,” McCormick said.

“The direction of the euro largely comes down to the
appetite for risk and what happens in the sovereign bond
market,” he said.

Meanwhile, analysts said perceptions that the Federal
Reserve could end up buying more than its initial target of
$600 billion in government bonds also made investors more
positive towards riskier assets and weighed on the dollar.

“The markets now think monetary policy will stay loose in
2011, and there’s no reason to think abundant liquidity will
die down soon,” said Stephen Gallo, head of market analysis at
Schneider Foreign Exchange.

“Risk appetite is up and the short U.S. dollar, long
commodities trade still looks to have legs,” he said.

The dollar fell 0.3 percent versus a currency basket (.DXY: )
at 79.333. European stocks rose 1.3 percent (.FTEU3: ) while
commodities also firmed, with U.S. crude for January (CLc1: )
rising to a 26-month high above $90 a barrel. Gold hit record
highs for the second day in a row. [ID:nLDE6B60GI]

The dollar was at 82.86 yen, up 0.27 percent and off a
three-week low of 82.34. Technical charts show dollar/yen
support lies around 81.70, the bottom of the Ichimoku cloud.

The Australian dollar traded at $0.9951 (AUD=D4: ), close to
a three-week high of $0.9966. It dipped slightly after the
central bank kept rates on hold at 4.75 percent and said
inflation would be little changed over the next few quarters.
The Aussie also recovered from losses on talk about Chinese
monetary tightening.

(Additional reporting by Neal Armstrong in London, Editing
by Chizu Nomiyama)

FOREX-Euro up on Ireland optimism, U.S tax cut extension