FOREX-Dollar gains ground as U.S. budget talks stall
* "Fiscal cliff" uncertainty dents growth-linked currencies * Boehner fails to muster Republican support for his bill * Thin year-end markets may exacerbate currency moves By Gertrude Chavez-Dreyfuss NEW YORK, Dec 21 (Reuters) - The dollar firmed on Friday after U.S. budget negotiations to avert spending cuts and tax increases took a turn for the worse, fuelling concerns the world's largest economy could slide into recession. Republican lawmakers delivered a blow to their leader, House of Representatives Speaker John Boehner, when they failed to back a bill designed to extract concessions from President Barack Obama in the "fiscal cliff" talks. A combination of tax hikes and spending cuts totalling $600 billion is due to kick in within weeks if U.S. legislators fail to reach a budget deal, a scenario that could result in a U.S. recession. Boehner has scheduled a news conference for 1500 GMT. The budget impasse has boosted demand for the most liquid government bonds and currencies such as the dollar and yen at the expense of growth-linked currencies such as the euro and Australian dollar. "The markets are becoming extremely nervous as time is running out for any compromise solution," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. "The greatest fear among investors is that the sudden shock to U.S. aggregate demand caused by the automatic sequestration of government spending and the simultaneous hike in taxes could have a chilling effect on global growth." The dollar index rose 0.26 percent to 79.466, with near-term resistance at its 200-week moving average of around 79.50. The dollar rose significantly against growth-linked currencies such as the Australian and New Zealand dollars. The euro was down 0.3 percent at $1.3197, its worst daily showing in two weeks. Europe's common currency has been in demand in recent sessions due to improved sentiment on euro zone assets and earlier optimism on the U.S. fiscal cliff. The dollar, meanwhile, lagged the yen, as investors trimmed large short positions against the safe-haven Japanese currency after the Bank of Japan this week increased its asset purchase program by less than some had expected. Both the dollar and the yen, the most liquid currencies, are likely to be in demand as long as the outcome of the U.S. budget talks remains uncertain. Gains could be exacerbated in thin market conditions before the year's end. The dollar was down 0.5 percent at 83.96 yen, well below its recent 20-month high of 84.62 yen. The yen also rose against the euro, with the single currency down 0.8 percent at 110.80 yen. IMPLIED VOLS RISE The Australian dollar fell to US$1.0417, its lowest since Dec. 4. The Aussie last changed hands at US$1.0431, down 0.5 percent. The New Zealand dollar. meanwhile, dropped 1.1 percent to US$0.8242. In the options market, near-term implied volatility rose as uncertainty about the budget talks grew. Demand to hedge against excessive price swings usually rises during times of financial uncertainty. One-month implied volatility rose to 7.2, from around 6.8 earlier this week. The rise reflected a jump in the volatility index for European stocks as investors sought to hedge against sharp corrections in shares. Traders also reported demand for dollar/yen implied volatilities. One-month dollar/yen volatility rose above 8 vols from around 7 in the middle of the week. Traders pared bets against the yen, which has been pressured in recent weeks by expectations that a new Japanese government will push the Bank of Japan into more forceful monetary easing.