FOREX-U.S. dollar rallies vs yen as Treasury yields rise

* Dollar gains as U.S. Treasury yields spike on sell-off

* U.S. tax cut renewal stokes fears about fiscal health

* Euro seen likely to slide back below $1.30 by year-end
(Updates prices, adds quotes, details, changes byline)

By Wanfeng Zhou

NEW YORK, Dec 7 (BestGrowthStock) – The dollar rose the most
against the yen in nearly three months on Tuesday after a
proposed extension of U.S. tax cuts triggered higher Treasury
yields, though the longer-term impact on the greenback is less
clear given an already large U.S. deficit.

The euro surrendered early gains versus the dollar after it
did not convincingly break above $1.34. Analysts expect the
currency to remain under pressure and slide below $1.30 in
coming weeks as fears about the euro zone’s debt problems
persist.

Benchmark U.S. Treasury yields hit their highest since July
as the proposed tax deal sparked concerns over the government’s
ability to service its debt burden. Moody’s Investors Service
said it is worried the extension of tax cuts could become
permanent, hurting U.S. finances and credit ratings in the long
run. For details see [ID:nN07283493] and [ID:nN07282425].

“We’ve seen Treasury yields move quite a bit higher and
that’s boosted the dollar,” said Ronald Simpson, director of
currency research at Action Economics in Tampa, Florida.

In afternoon trading, the dollar rose 1 percent to 83.45
yen (JPY=EBS: ), on track for its biggest daily percentage gain
since Sept. 15.

An index of the dollar against a basket of other major
currencies (.DXY: ) gained 0.36 percent to 79.854.

Despite the rise in the dollar, some analysts said
deteriorating U.S. fiscal positions could pose risks to the
currency in the medium to long term. In recent years, dollar
bears have been worried about the ability of the United States
to continue funding its large deficits if foreign investors
lose faith in U.S. assets.

“There are structural risks to the dollar. The whole world
is cutting back on spending and the United States has just
announced tax cuts,” said Jessica Hoversen, fixed income and
currency analyst at MF Global in Chicago.

“However, the economic data has looked better. People are
still active buyers of U.S. Treasuries. There are arguments to
be made that the dollar won’t aggressively resume its
downtrend,” she added.

FURTHER EURO LOSSES LIKELY

The euro (EUR=EBS: ) last traded down 0.1 percent at $1.3296
having hit a session high of $1.3401 on trading platform EBS.
It had risen after a report suggested Ireland would pass an
austere budget on Tuesday. [ID:nLDE6B51VW] [ID:nLDE6B60DA]
[ID:nLDE6B60A6]

Investors continued to sell the euro on any bounce as
optimism about an Irish budget was overshadowed by broader
worries about the European Union’s ability to keep debt
problems from spreading.

“If the Irish pass an austerity budget, it alleviates some
political uncertainty, but EU finance ministers provided no
signals for additional steps to help stabilize European credit
markets,” said Omer Esiner of Commonwealth Foreign Exchange in
Washington.

Hedge fund manager David Einhorn, chairman and founder of
the $6.8 billion Greenlight Capital, said he doesn’t expect the
euro to gain much traction against the dollar as the European
situation has yet to stabilize.

“It’s still an open question. It’s still in progress,” he
said at the Reuters Investment Outlook Summit on Tuesday.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 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: http://r.reuters.com/hyb65p PDF on yuan offshore market: http://r.reuters.com/byg28q ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Mark McCormick, currency strategist at Brown Brothers
Harriman in New York, said the euro is also at risk of dropping
if China decides to implement a rate cut over the weekend.

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]
(Additional reporting by Julie Haviv and Gertrude
Chavez-Dreyfuss; Editing by James Dalgleish)

FOREX-U.S. dollar rallies vs yen as Treasury yields rise