Dollar Drifts Higher Amid Fiscal-Cliff Concerns

The dollar edged higher in Asian trading hours on Wednesday, with the prospect of large-scale U.S. tax hikes and spending cuts sending investors into safer investment harbors.

Tuesday saw Senate Majority Leader Harry Reid say that there had been “little progress” made toward reaching a deal on the fiscal cliff — more than $600 billion of tax hikes and spending cuts due to take place at the start of the year unless a compromise between U.S. political parties is reached.

The ICE dollar index , which measures the greenback against a basket of six rivals, reached 80.360, up slightly from 80.344 in late trading on Tuesday. The dollar sometimes gains when investor uncertainty rises.

“With a lack of development over the U.S. budget talks dousing some recent market enthusiasm, the run higher in ‘risk’ assets has for the moment stalled, much like the fiscal-cliff discussions themselves it would seem. As a result, there is an uptick in U.S. dollar buying,” said Tim Waterer, trader at CMC Markets.

Meanwhile the euro  slipped to $1.2936, from $1.2944 late the previous day, when the currency received a short-lived boost from an agreement between Greece and its institutional lenders designed to pave the way for the next tranche of financial aid to the country.

“The realization that any aid to Greece will still be subject to several parliamentary approvals, ongoing reforms and a successful debt buyback may have dampened sentiment, or more likely, the deal was already priced in,” said Mitul Kotecha, head of foreign-exchange strategy at Credit Agricole.

The British pound  inched down to $1.6017, from $1.6023 on Tuesday.

However, the dollar  did fall against another currency generally viewed as a safe haven — the Japanese yen. The U.S. unit bought ¥81.87, falling from ¥82.12 late the previous day.

BNP Paribas strategists believe that the dollar could gain further in the short term but may struggle longer-term.

“As long as fiscal-cliff uncertainty is not resolved, the U.S. dollar is likely to see bouts of safe-haven demand,” said strategist Vassili Serebriakov.

“Still, we believe it is best to position for U.S. dollar weakness into the December Federal Open Market Committee announcement, which will probably set the tone for the U.S. dollar over the medium term,” the strategist said.

Marketwatch