The euro halted a two-year losing streak as European Central Bank president Mario Draghi's commitment to backstop the shared currency stymied a debt-contagion threat.
In its 14th year, the 17-nation currency rebounded against the US dollar after sliding almost 10 per cent during the prior two years. The yen extended the largest loss against the dollar among major currencies as Japanese Prime Minister Shinzo Abe put pressure on the central bank to increase monetary stimulus. The greenback was little changed as US policymakers struggled with deficit control and the Federal Reserve extended its record-low interest rate target and bond-buying plans.
"The ECB has gone a long way to suppress the forces of the crisis and contain systemic risk," said Lena Komileva, London-based chief economist at G+ Economics. "This is the primary reason the euro has been as strong as it has. Initially this year, the market underestimated the effectiveness of the ECB."
The euro was up 2 per cent for the year to US$1.3216 on December 28 in New York, after dropping 3.2 per cent last year and 6.5 per cent in 2010. It remained below its lifetime peak of US$1.6038 on July 15, 2008, traded as high as US$1.3487 on February 24 and as low as US$1.2043 on July 24.
The yen was down 10.5 per cent to 85.96 per dollar. Japan's currency has weakened 12.3 per cent to 113.61 per euro. The Brazilian real has lost 8.8 per cent against the dollar in 2012, the second-biggest loser after the yen. The South Korean won leads all 16 of the dollar's biggest peers with a gain of 7.7 per cent.
Draghi said on July 26 that he would do whatever it took to ensure the resilience of the euro and announced in September a bond-buying plan, which pledges unlimited support for countries that sign up to economic reforms as part of a bailout from Europe's rescue fund. The Outright Monetary Transactions programme caused bond yields of the region's most-indebted nations to decline.
The shared currency touched its annual low on July 24 as euro-zone policymakers struggled to find a solution, with creditor countries in the north demanding austerity from the south as a condition for aid. Leaders that week approved a third bailout plan for Greece.
The ECB has also flooded the banking sector with more than €1 trillion (HK$10.21 trillion) beginning in December 2011. On July 5, the Frankfurt-based central bank cut its benchmark interest rate to a historic low of 0.75 per cent and took its deposit rate to zero.
"The fact that Draghi said in July that he would do whatever it would take was very, very important," said Doug Borthwick, managing director and head of foreign exchange at Chapdelaine & Co. "The ECB had talked about using a bazooka a number of times before but this was the first time that Draghi actually showed it from behind the curtain."
The yen is down 14 per cent this year, posting the biggest depreciation among the 10 developed-nation currencies.
Abe, who was approved as prime minister by Japan's parliament after his party won a landslide victory in the December 16 vote, said two days earlier that he would push for "bold monetary easing". During his campaign and afterwards, Abe has pledged to weaken the currency, stoke inflation and achieve 3 per cent nominal economic growth.
Japan's deflation-plagued economy has contracted 7 per cent since 2007 as six prime ministers, including Abe in his first term, failed to reverse the course.
"The yen will weaken further, given the election of Abe," said John Taylor, chairman and founder of FX Concepts. "The yen will weaken versus the US dollar into the first week or so of February", reaching 90 before reversing course.
Economists predict the yen will trade at 87 per dollar by the end of 2013.
The dollar index fell 0.6 per cent to 79.683 from 80.178 at the end of 2011, a year it gained 1.5 per cent.
US politicians will continue efforts to reach a budget agreement to avert US$600 billion in tax increases and spending cuts that have become known as the fiscal cliff.
The Fed will add US$45 billion in Treasuries in January to the US$40 billion in mortgage bonds it is currently purchasing a month in its third round of bond-buying, known as quantitative easing.
Tom Holland is on holiday