FOREX-Yen poised for biggest yearly drop vs dollar since 2005
* Yen gets bit of a respite after last week's drop
* But yen down nearly 12 pct vs dollar in 2012
* Dollar/yen backs off from highest since Aug 2010
* Near-term focus on U.S. fiscal cliff negotiations
By Masayuki Kitano
SINGAPORE, Dec 31 (Reuters) - The yen held above a two-year low versus the dollar on Monday but remained on track for its largest annual drop in seven years, pressured by expectations for more forceful monetary easing by the Bank of Japan.
The dollar last stood at 85.91 yen, having retreated from Friday's high of 86.64 yen, which was the greenback's strongest level versus the Japanese currency since August 2010.
As the year draws to a close, the dollar is up about 11.6 percent against the yen for 2012, putting it on track for its biggest percentage gain versus the Japanese currency since 2005.
With a new Japanese government led by Prime Minister Shinzo Abe expected to pursue a policy mix of aggressive monetary easing and heavy fiscal spending to beat deflation, analysts see the yen staying under pressure in 2013.
A near-term focal point, however, is whether U.S. lawmakers can hash out a last-minute deal to avoid the so-called "fiscal cliff" of $600 billion in tax increases and spending cuts that are set to take effect from early January.
Efforts to prevent the U.S. economy from tumbling over the fiscal cliff stalled on Sunday as Democrats and Republicans remained at loggerheads over a deal that would prevent taxes for all Americans from rising on New Year's Day.
After adjourning for the day, the U.S. Senate was set to reconvene at 1600 GMT on Monday.
"If things stay the way they are, there will be little choice but to see a 'risk-off' move starting from Jan. 2," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
The yen could push higher in the short term due to the concerns about the U.S. fiscal cliff, Okagawa added.
Market players have been fretting that equities and other risky assets may come under pressure if U.S. lawmakers fail to reach an agreement before Jan. 1.
Such a broad retreat from risk-taking could bolster the dollar against currencies such as the euro and the Australian dollar. In times of market turbulence, investors often flock to the greenback, which is regarded as a safe haven because of its deep liquidity.
The euro edged up 0.1 percent to $1.3231, but stayed below an 8-month high of $1.33085 hit on Dec. 19.
The Australian dollar rose 0.3 percent to $1.0401, but was still not too far from a one-month low of $1.0345 set last week.