The US dollar gained against the euro on Wednesday after President Barack Obama set a goal to cut the US budget deficit, but it failed to reverse bearish sentiment driven by unfavourable interest rate differentials. Obama set a goal of cutting the US budget deficit by $4 trillion, plunging into the debate over the nation's fiscal woes after accusations he has failed to lead on the issue.
The deficit has prompted some market participants to question the US government's fiscal state and ability to repay its debt, which in turn has weighed on the dollar. Sentiment toward the dollar remains overwhelmingly bearish, largely due to expectations the US Federal Reserve will significantly lag global central banks in raising interest rates.
In late afternoon New York trading, the euro was down 0.2 percent at $1.4442, after earlier hitting a 15-month peak of $1.4521 on EBS trading platform. The euro-zone currency could be vulnerable to pullbacks after racking up about 8 percent gains this year. Overall, though, the euro remained supported by the prospect of more interest-rate hikes by the European Central Bank.
Nomura Securities said that in addition to the ECB's tightening, the euro has been supported by a decline in systemic risk in the euro zone banking system, and a related decline in the EUR risk premium has also been key. With a more hawkish ECB already priced in at this point, the euro's systemic improvement is genuine and should hold in the coming months, especially if euro-zone banks continue to raise new capital, Nomura said. "In this scenario, the risk premium can stay lower in coming months, and EURUSD volatility will then increasingly come from other factors. More traditional factors, such as relative monetary policy, oil prices, and global USD direction are high on this list of drivers." Looking at those forces, a move toward $1.40 is likely by the end of the second quarter, the firm said.
Meanwhile, the yen fell against the dollar after rising for four straight days, as risk appetite improved and the currency's downtrend was seen intact as long as risk-taking holds up. The dollar was up 0.2 percent at 83.80 yen after sliding more than 1.2 percent on Tuesday in its biggest one-day fall in four months.
Against the yen, the euro was nearly unchanged at 121.04 yen, well below an 11-month high of 123.33 yen hit on Monday. The negative impact on Japan's economy from the recent earthquake should ensure Japanese monetary policy remains ultra-loose for a prolonged period. That should prompt investors to use the yen as a funding currency in carry trades.