RPT-FOREX-Dollar, yen fall after U.S. fiscal deal, euro firmer
* U.S. Congress approves deal to avoid "fiscal cliff"
* Euro/yen hits 18-month peak, euro/dollar eyes 9-month high
* Dollar/yen hits 29-month high, more weakness likely
* U.S. ISM factory activity index due 1500 GMT
By Anooja Debnath
LONDON, Jan 2 (Reuters) - The yen fell to a 18-month low against the euro while the dollar faltered against growth-linked currencies on Wednesday after U.S. lawmakers passed a bill to avoid a "fiscal cliff" of tax rises and spending cuts.
Traders said the passage of the bill removed a major uncertainty hanging over markets in the near term, lifting demand for riskier assets such as stocks and commodities and triggering a sell-off in safe-haven government bonds.
Like the yen, the highly-liquid dollar - a currency bought in times of market stress or economic uncertainty - came under pressure and fell against the euro and the Australian dollar. Further selling is expected to weigh on the dollar as more investors with fresh budget allocations return after the holidays.
U.S. lawmakers approved on Tuesday a deal preventing huge tax hikes and spending cuts that would eventually have pushed the world's largest economy into recession.
That provided relief and the euro rose as high as 115.995 yen on trading platform EBS, its highest against the Japanese currency since July 2011. After trimming gains, the euro was up about 0.9 percent for the day at 115.48 yen, with option barriers cited at 116 yen.
"Clearly the markets have turned more risk-seeking this morning with the worst of the fiscal cliff avoided," said Adam Cole, global head of FX strategy at RBC Capital Markets. "That has left the dollar and yen weaker and it is going to be hard to fight that trend in the near term."
Strategists added that lingering concerns about spending cuts, which were delayed for two months, and over the government's borrowing limit have taken the back seat for now.
Markets will focus on the U.S. factory activity index for December due 1500 GMT which is expected to show a slight expansion in the sector. This could further boost risk sentiment and keep the dollar under pressure, traders said.
The euro was up 0.5 percent at $1.3273, not far from the 8-1/2 month high of $1.33085 hit on Dec. 19. Traders cited stop loss buy orders above $1.3310 with option barriers at $1.3360. Bids were seen at $1.3220/40.
Strategists warned that further gains in the euro could be limited if concerns about the euro zone economy reemerge.
"We are somewhat cautious about the euro/dollar near-term outlook as it may struggle to extend its gains above $1.33 with investors potentially looking to take-profits at current levels," said Valentin Marinov, head of European G10 FX strategy at Citi. "The next big move may well be on the downside."
Despite falling to a two-week low versus the Australian dollar and easing against the euro, the dollar rose against the yen to 87.335, its highest since late July 2010. The dollar was last up 0.4 percent at 87.00 yen.
The increase in investor risk appetite after the budget deal added to pressure on the yen, which has been hurt by expectations a new Japanese government led by Prime Minister Shinzo Abe will push the Bank of Japan into more forceful monetary easing to beat deflation.
But some strategists warned of a potential yen rebound after the next BOJ meeting on Jan. 21-22.
"If the BOJ signals less appetite for more aggressive quantitative easing at its meeting in late January, despite continuing political pressure and following the measures announced in December, this could be seen as a disappointment," Citi's Marinov said.
"It could be a sufficient incentive for investors to take profit on short yen positions and result in a temporary slowdown in the current yen slide."
Speculators' bets against the yen hit more than five-year peaks in December, but have eased in the past two weeks. Nonetheless, the yen has hit a four-year low against the higher-yielding Aussie and New Zealand dollars .
In the options market, one-month dollar/yen implied volatility touched an 8-1/2 month high of 9.2 on Wednesday according to Thomson Reuters data as demand to hedge against further yen weakness gathered pace. It was last at 8.65 vols, some way off the mid-December low of 7.1.
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