* U.S. Congress approves deal to avoid "fiscal cliff"
* Key U.S. economic data, including ISM, payrolls due this
* Dollar climbs to strongest since July 2010 versus yen
By Wanfeng Zhou
NEW YORK, Jan 2 The dollar and yen fell on
Monday after U.S. lawmakers approved a last-minute deal to avert
huge tax rises and spending cuts, eroding demand for the U.S.
and Japanese currencies as safe havens.
The passage of the bill to avoid the "fiscal cliff" removed
a major uncertainty hanging over markets in the near term, but
some analysts cautioned the optimism could fade if U.S. economic
data later this week disappoints.
"The focus moves away from Washington D.C. and goes back to
economic data. The market wants to see supporting data that
growth is still intact," said Boris Schlossberg, managing
director of FX Strategy at BK Asset Management.
"I think we are a little vulnerable, frankly, because the
uncertainty that surrounded December took a pretty serious slice
off demand," he said. "If we see disappointing numbers over the
next couple of days, you'll probably see the risk rally come
The Institute for Supply Management is set to release its
manufacturing data for December later on Wednesday. The ISM
services data is due on Friday, the same day as the government
payrolls data for last month.
The House of Representatives voted for a bill late on
Tuesday that prevented $600 billion in automatic spending cuts
and tax increases. Economists had feared such measures would
push the U.S. economy into recession.
The euro rose as high as $1.3299 on Reuters data, the
highest in two weeks and not far from an 8-1/2-month high set on
Dec. 19. It was last at $1.3248, up 0.3 percent.
Against the yen, the euro rose to 115.99 yen on
Reuters data, the strongest since July 2011, and was last up 0.8
percent at 115.39 yen. Option barriers were 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."
Some strategists warned that further gains in the euro could
be limited if concerns about the weak euro zone economy
Euro zone factories sank deeper into recession in December,
data showed on Wednesday. Markit's Eurozone Manufacturing
Purchasing Managers' Index (PMI) fell to 46.1 from November's
46.2. It has been below the 50 mark that divides growth from
contraction since August 2011.
"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."
Higher-yielding and growth-linked currencies rallied. The
Australian dollar rose 1 percent to $1.0499 after hitting
a two-week high. The New Zealand dollar gained 1.1
percent to $0.8364.
The dollar rose 0.5 percent versus the yen to 87.07,
having touched 87.33 yen earlier, the highest since late July
The yen has also come under pressure in recent weeks on
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.
Speculators' bets against the yen hit more than five-year
peaks in December but have eased in the past two weeks. 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."
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.