* Euro retraces gains after failure to rise above $1.33
* Focus shifting to Friday's jobs data, debt ceiling debate
* Yen up vs dollar after hitting highest since July 2010
By Wanfeng Zhou
NEW YORK, Jan 3 The euro fell against the dollar
on Thursday as optimism over a U.S. budget deal quickly faded
and investors awaited a closely watched U.S. government jobs
report due on Friday.
The euro had surged early on Wednesday after U.S. lawmakers
reached an agreement to prevent huge tax hikes and spending cuts
that some economists said could have tipped the world's biggest
economy back into recession.
But the euro soon surrendered all gains as investors grew
worried about more budget fights ahead. Analysts say the market
could be set up for volatility as President Barack Obama and
congressional Republicans tussle over the next two months.
"After yesterday's big move, the market is just taking a
little bit of a breather here," said Amarjit Sahota, director of
Klarity FX in San Francisco.
"Focus is now turning to the debt ceiling and the spending
cuts, which still need to be agreed."
Republicans, angry the fiscal cliff deal did little to curb
the federal deficit, promised to use the debt-ceiling debate to
win deep spending cuts next time.
The euro fell 0.6 percent to $1.3106. It had earlier
dropped to $1.3082 according to Reuters data, the weakest since
Dec. 14, after stop-loss sell orders were triggered below
Traders said the euro's failure to break above $1.33 in the
previous session drew sellers into the market.
Strategists said the current weakness in the euro could
persist as the euro zone economy falls deeper into recession and
on increasing prospects of an interest rate cut by the European
Highlighting market concerns that the U.S. deficit issues
remain unresolved, ratings agency Moody's Investors Service said
the United States must do more to rescue its Aaa debt rating
from its current negative outlook.
Standard & Poor's said the fiscal deal does not affect its
negative view of the U.S. credit outlook, and said more work
remains ahead for policymakers.
Adding to gains in the dollar versus the euro was data
showing U.S. private-sector employers added more new jobs than
expected last month.
Separate data showed U.S. initial jobless claims rose last
week, but the trend remained consistent with steady job growth.
Later in the session, the Federal Reserve will release the
minutes of its latest policy meeting.
On Friday, the U.S. government will release its closely
watched monthly nonfarm payrolls report. The economy likely
added 150,000 in December, according to a Reuters survey of
economists, up from 146,000 in November. The unemployment rate
is expected to hold steady at 7.7 percent.
The dollar index, which tracks the greenback versus
six major currencies, rose to 80.229, the highest since Dec. 11.
It was last up 0.4 percent at 80.137.
The euro fell 1.1 percent to 113.91 yen as
investors took profits on its rise to an 18-month high of 115.99
yen on Wednesday.
"Euro/yen at around 115 levels was starting to look a bit
overdone and the euro may actually lose ground against the yen
in the coming weeks. It's moved too far too fast," said Colin
Asher, senior economist at Mizuho Corporate Bank.
The dollar fell 0.5 percent to 86.93 yen, after
climbing as high as 87.36 earlier in the global session, the
highest since July 2010.
Over the past few weeks, the yen has weakened on
expectations that a new Japanese government led by Prime
Minister Shinzo Abe will push the Bank of Japan into further
monetary easing to beat deflation.
Analysts said the yen is likely to remain vulnerable until
the BOJ's policy meeting on Jan. 21-22.
The Australian dollar rose 0.1 percent to $1.0513
after a 1 percent rally in the previous day, supported by data
showing China's services sector expanded in December.