Dollar rallies versus euro on US tax plan report

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TOKYO: The dollar rose against the euro in Asia Tuesday on a report about a corporate tax holiday on the foreign profits of US firms being debated by Congress that would boost flows back to the US, dealers said.

Risk-sensitive currencies such as the euro also took a hit from a report by ratings agency Moody's that Chinese banks may be facing bigger problems with municipal loans, which is reducing risk appetite, said dealers.

The euro sagged to $1.4471 in Tokyo morning trading from $1.4524 in London late Monday. The European single currency was almost flat at 117.32 yen against 117.30 yen.

The dollar gained to 81.06 yen from 80.77 yen.

A Bloomberg report said a reduction in income tax on repatriated profits being debated by Congress could lead to as much as $700 billion in flows back to US, strengthening the dollar.

The US market was closed Monday for the July 4 Independence Day holiday.

The single currency had earlier held firm despite a warning on Greece's debt from ratings agency Standard & Poor's that cast a shadow over recent progress in the debt crisis.

S&P said Monday that recent proposals for a new Greek bailout, under which private sector banks would rollover debt to give Greece more time to repay its debt, would be tantamount to a default.

"The euro's recent rise has been capped by the S&P warning that followed (the parliamentary vote for austerity measures )," said Teppei Ino, analyst at the Bank of Tokyo-Mitsubishi UFJ.

Ino added "the euro is unlikely to fall too far ahead of the ECB's meeting later this week."

At its policy meeting Thursday, the European Central Bank (ECB) is expected to raise interest rates for the second time this year, by 0.25 percentage points to 1.5 percent in a bid to curb inflation, dealers said.

"Investors are watching the ECB's statement and remarks by (bank president Jean-Claude) Trichet for clues to whether the central bank would raise rates further later this year," Ino said.

The dollar has been supported against the yen by positive sentiment on the back of recent gains in US Treasury yields and a rally in the stock market, a trust bank trader told. (AFP)