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Dollar climbs to 3-week peak vs yen on US tax reform prospects

Key Points
  • Senate, House likely to meet next week for U.S. tax bill, although analysts are skeptical about the bill's impact on U.S. growth.
  • Markets are focused on U.S. non-farm payrolls report.
  • Pound moves lower versus both the the dollar and euro after EU's Junker and U.K. Prime Minister May announce no Brexit deal has been reached.
A cashier at a Travelex Bureau de Change counts dollars in exchange for pounds in London.
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The dollar rose on Monday, hitting a three-week high versus the yen after the U.S. Senate approved a major tax overhaul over the weekend that aims to cut taxes for businesses, while proposing a mixed package of changes for individual Americans.

"Dollar bulls are pinning their hopes on the sweeping tax deal leading to a more rapid pace of interest rate hikes from the Federal Reserve," said Jake Spark, U.S. corporate hedging manager at Western Union Business Solutions, in Washington.

The Republican tax legislation would be the largest change to U.S. tax laws since the 1980s. Republicans want to add $1.4 trillion over 10 years to the $20 trillion national debt to finance changes that they say would further boost the economy.

Talks will begin, likely this week, between the Senate and the House of Representatives, which already approved its own version of the legislation, to reconcile their respective bills. But Lennon Sweeting, chief market strategist at XE in Toronto, said he expects the dollar's gains to be capped by political concerns in Washington.

Former national security adviser Michael Flynn was the first member of Trump's administration to plead guilty to a crime uncovered by Special Counsel Robert Mueller's investigation into Russian attempts to influence the 2016 U.S. election and potential collusion by Trump aides.

Some market participants were also skeptical about how significant the impact of the tax bill would be on U.S. growth. Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets in London, said U.S. growth could rise by just 0.2 to 0.3 percent annually, not enough to persuade the Fed to raise rates at a faster pace.

The dollar rose to 113.08 , the highest since mid-November, and was last at 112.59, up 0.44 percent.

The euro, meanwhile, also fell against the dollar, down 0.34 percent at $1.1848, pushing the dollar index to trade up 0.3 percent on the day at 93.181.

Investors are also focused this week on a key U.S. non-farm payrolls report, with analysts forecasting a 200,000 jobs gain for November versus 260,000 the previous month. This would be the last employment report before the Fed holds its last policy meeting for the year next week and markets have already priced in a rate hike for that meeting.

Currency markets expect the Fed to raise rates only slightly more than twice next year. Even though U.S. 10-year U.S. yields were higher on Monday, they remain effectively within a 15 basis-point range over the last two months.

Meanwhile, the pound moved lower versus both the the dollar and euro after EU's Junker and U.K. Prime Minister May announced Monday no Brexit deal has been reached.

Sterling reversed gains from earlier in the day to trade 0.07 percent lower at $1.3461 after reports of no Brexit agreement surfaced.

In a press briefing after Monday's meeting in Brussels, Juncker said that there were still two or three issues that needed to be agreed.

The EU head added that he felt sufficient progress between the parties could be achieved by the time of the EU leaders summit on December 14.

May agreed that a positive conclusion was still within grasp and that talks would continue later this week.

The pound had traded a quarter of a percent higher on the day after a member of the European Parliament's Brexit group said there was a "very good chance" of a deal on an initial divorce package between Britain and the European Union.

CNBC's Michael Sheetz and David Reid contributed to this report.