FOREX-Euro rises to 7-1/2-month high on hopes of US budget deal
* Boehner presses forward to avoid fiscal crisis
* End of year demand could see euro testing March high
* S&P upgrades its debt rating on Greece
* Yen vulnerable to expectations of easing
NEW YORK, Dec 18 (Reuters) - The euro rose against the dollar for a seventh straight session on Tuesday, hitting its highest level in more than seven months, as signs of progress in U.S. budget negotiations buoyed demand for riskier assets. The safe-haven U.S. dollar and Treasury bonds fell, while global stocks rallied on raised expectations that Congress will reach a deficit reduction deal by the end of the year. If an agreement is not reached in less than two weeks the United States will hit the so-called "fiscal cliff" of automatic tax increases and spending cuts next year. This would have the potential to send the world's largest economy back into recession. A deal to avoid the "fiscal cliff" looked closer on Tuesday after House of Representatives Speaker John Boehner kept the support of his Republican colleagues for compromises in talks with President Barack Obama. Obama's latest offer to reach a deal with Republicans in the U.S. House of Representatives is a "good faith" effort to reach a compromise, the White House said. "Arguably the market's mood has moved from one of hope to encouragement, favorable sentiment that is underpinning some foreign currencies," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. "While trading conditions are somewhat thin and could contribute to some unpredictable moves, our bias is for further foreign currency gains in the near term," he said. Some strategists said year-end investment flows could help the euro extend its gains to test the late-March high just below $1.34, although concerns about the euro zone's weak growth outlook may leave it vulnerable to selling in the new year. The euro was last up 0.5 percent at $1.3224 after earlier hitting a high of $1.3238, its strongest level since early May. Traders said investors took out option barriers at $1.32, prompting more euro buying. The dollar index fell to a two-month trough of 79.260. The index was last quoted at 79.342, down 0.3 percent. Euro strength also helped push Spanish and Italian yields lower, further raising risk appetite. It has so far been a banner month for the euro, appreciating about 1.6 percent against the dollar, partly due to faded fears of a U.S. fiscal crisis, but mostly due to less concern about the euro zone's debt crisis. Rating agency Standard & Poor's on Tuesday raised Greece's sovereign credit rating to B-minus with a stable outlook from selective default, citing the efforts of the country's European partners to keep it in the euro. Euro zone partners and the International Monetary Fund have agreed to unlock 49.1 billion euros in aid by the end of March. They made the decision to release the long-delayed installment after Athens passed austerity measures and completed a debt buyback. At current prices, the single currency shared by 17 countries has gained 2.7 percent so far in the fourth quarter and is up 2.1 percent on the year.
BANK OF JAPAN MEETING IN FOCUS The Japanese currency tumbled after the Liberal Democratic Party surged back to power in an election on Sunday, fueling expectations the new government will drive the Bank of Japan toward more aggressive monetary easing. The dollar was last up 0.4 percent at 84.24 yen, according to Reuters data. It earlier hit a session peak of 84.27, not far from a high of 84.48 yen on Monday, which was its strongest level since April 2011. Traders cited option barriers at 84.50 yen with stop-loss buy orders above that level. "The outlook for more political pressure on the Japanese central bank is decidedly negative for the yen," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "However, having shed over 5 percent of its value against the dollar in the last month alone, the yen may be poised for a bit of a bounce." Analysts said a recovery in the yen could happen if the BoJ disappoints those expecting more aggressive monetary easing. The bank holds a two-day policy meeting Wednesday and Thursday. Speculators have sold the yen on expectations the BoJ could adopt a more aggressive asset-buying program, but sources familiar with the BoJ's thinking have said the most likely option is for the central bank to increase its asset-buying and lending program, currently at 91 trillion yen, by 5-10 trillion yen. That would fall short of expectations and could lead some investors to shed large short positions in the Japanese currency.