FOREX-Euro falls, yen rebounds as U.S. budget talks stall

Fri Dec 21, 2012 3:56am EST

Related Topics

* "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 Nia Williams

LONDON, Dec 21 (Reuters) - The euro fell and the yen firmed against the dollar on Friday after talks to resolve a U.S. budget crisis ground to a halt, fuelling concerns the world's largest economy could be tipped into recession.

Republican lawmakers delivered a blow to their leader, House of Representatives Speaker John Boehner, when they failed to back an effort designed to extract concessions from President Barack Obama in the "fiscal cliff" talks.

That threw into disarray attempts to reach an agreement to avert $600 billion of tax hikes and spending cuts, due to kick in within weeks.

Concern over the impasse dented demand for so-called high-beta currencies that tend to rise or fall with the global growth outlook, such as the euro and Australian dollar, and lifted the highly liquid U.S. dollar and yen, which are seen as safe havens.

"We have had a very good run in the euro and what we are seeing at the moment is a little bit of profit-taking triggered by disappointment in the fiscal cliff discussions," said Audrey Childe-Freeman, head of FX strategy at BMO Capital Markets.

"This is a classic risk-off trading environment where the yen did best, followed by the dollar, and higher-beta currencies underperformed."

The euro hit a session low of $1.3180, before paring losses to last trade down 0.4 percent on the day at $1.3195.

It retreated from an 8-1/2 month high of $1.33085 hit on Wednesday after better German business confidence data triggered buying in thin holiday markets.

Technical strategists cited support for the euro around $1.3150, the 38.2 percent retracement of the move from the May 2011 high near $1.49 to the July 2012 low just above $1.24.

Many strategists said further losses for the euro and other growth-linked currencies would be limited by expectations the White House and Republicans will keep working towards some kind of U.S. fiscal deal.

"I don't think either side wants to take the risk of seeing the economy worsen and unemployment rise....Efforts will be made to search for a compromise to limit the impact of the cliff," said Kimihiko Tomita, head of FX for State Street Global Markets in Tokyo.

YEN REBOUNDS

The dollar, which rose against a basket of currencies , nonetheless dipped against the yen, falling 0.4 percent to 84.04 yen, pulling away from a 20-month high of 84.62 yen struck on Wednesday.

Traders trimmed some of their bets against the yen, which has been pressured in recent weeks by expectations that a new Japanese government, elected last weekend, will push the Bank of Japan into more forceful monetary easing.

The euro fell 0.7 percent to 100.97 yen, down from a 16-month peak of 112.59 yen set on Wednesday.

A sudden plunge in U.S. stock index futures as Boehner cancelled a vote on his proposal also helped trigger a sell-off in perceived riskier assets, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.

The higher-yielding Australian dollar fell 0.4 percent to US$1.0443, its lowest level since Dec. 4, while the New Zealand dollar dropped 0.6 percent t0 US$0.8285.

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