Dec. 8 (Bloomberg) -- The dollar rose for a third day, lifted by speculation that extended U.S. tax cuts will bolster the economy and a resurgence in tensions between North and South Korea that prompted investors to move funds out of Asia. The U.S. currency gained against 12 of its 16 major counterparts and Treasury yields surged after President Barack Obama agreed to extend tax reductions introduced by the administration of George W. Bush for two years. The South Korean won fell, snapping a five-day rally, as Yonhap News said the North fired artillery shells near the disputed western border. "We've seen yield spreads blowing out in terms of U.S. versus Europe and versus Japan, and I think that provides a little bit of fundamental rationale to come back to the dollar," said Jeremy Stretch, executive director of foreign- exchange strategy at Canadian Imperial Bank of Commerce in London. "Further risk factors in Korea are certainly not going to be harmful to the dollar's performance." The dollar rose 0.2 percent to $1.3237 per euro at 7:23 a.m. in New York. The U.S. currency reached $1.3442 per euro on Dec. 6, the weakest since Nov. 23. It gained 0.6 percent to 83.98 yen, from 83.49 yen yesterday, when it touched 82.34 yen, the lowest since Nov. 12. The euro appreciated 0.3 percent against the yen to 111.05. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, rose 0.3 percent to a week high of 80.134 as investors sought the increased U.S. yields. Treasury Yields Obama said on Dec. 6 he would accept lower tax rates on high earners' income, dividends, capital gains and multi-million dollar estates for the next two years in exchange for extending federal unemployment insurance. The current tax rates, enacted in 2001 and 2003, were set to increase on Dec. 31. Moody's Investors Service Inc. said yesterday that Obama's agreement to extend the tax cuts won't lead to a downgrade of the nation's Aaa credit rating. "The jump in U.S. yields helped spark a rally in the U.S. dollar," David Watt, senior currency strategist at Royal Bank of Canada's RBC Capital Markets unit in Toronto, wrote in a research note today. Treasuries, Japanese bonds and German bunds all slid. The difference between 10-year yields in the U.S. and Japan increased to 2.06 percent today, the widest since June, data compiled by Bloomberg show, enhancing the allure of U.S. assets. U.S. Unemployment A report tomorrow is forecast to show U.S. initial jobless claims declined. They fell to 425,000 last week from 436,000 the previous week, according to the median estimate of economists in a Bloomberg News survey before tomorrow's data. South Korea's won extended earlier losses after reports of artillery fire from the North spurred demand for the refuge of the dollar. An official at President Lee Myung Bak's office said none of the shells crossed the border into South Korean waters, and the government is examining the incident. The won dropped 1.3 percent to 1,146.10 per dollar. The currency also weakened after the Bank of Korea said the nation's current-account surplus was less than previously reported. South Korea's central bank estimated the surplus in the broad measure of trade during the first 10 months of the year was $23.17 billion from $29 billion earlier. The dollar has gained 3.2 percent over the past month in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The euro has dropped 2.4 percent, while the yen is down 0.4 percent. Losses in the euro were limited as Irish Finance Minister Brian Lenihan won the backing of lawmakers in the first votes on his 6 billion-euro budget. Under Pressure The government is under pressure to pass the legislation to secure an 85 billion-euro bailout as the fiscal squeeze threatens to prolong a slump that has seen the economy shrink 11 percent over the past three years. "The passage of Irish budgetary measures was never going to be a raging positive for the euro," said Stretch. "It's a case of the structural negatives in the euro-zone that are still there being matched against the spread moves in yields, which are favoring dollars over euros." German exports unexpectedly dropped in October as austerity measures across the euro region eroded demand for German goods in the country's biggest export market, according to data from the Federal Statistics Office today. Switzerland's BAK Basel Economic Institute today said economic growth will weaken less in 2011 than it had previously forecast. The Swiss franc gained against the majority of its most actively traded peers. It was less than 0.1 percent lower against the dollar at 98.85 centimes, versus 98.77 centimes the previous trading day. It appreciated 0.2 percent to 1.3073 per euro.

Source