* Euro dips, some see its recent rise as overdone
* U.S. budget talks main focus in year-end trades
* Dollar steady after hitting 2-year high vs yen
* Currency moves volatile due to thin liquidity
By Anooja Debnath
LONDON, Dec 28 The euro fell against the dollar
on Friday, the last full day of trading for the year in Europe,
as investors took profit on its recent gains, while investors
focused on U.S. budget talks.
The euro was down 0.4 percent on the day at $1.3183,
having slipped to a session low of $1.3166 when traders said it
broke below stop loss sell orders around $1.3170.
Although analysts partly attributed the euro's drop to
year-end dollar demand and thin liquidity, they said unwinding
of long euro positions were weighing on the currency.
The euro has made rapid strides since mid-November, gaining
around 5 percent in a month to hit an 8-1/2 month high of
$1.33085 on Dec. 19 as worries around the euro zone crisis
"There is still a good chunk of scepticism among market
participants about the euro being significantly higher than the
$1.32-$1.33 level," said Ulrich Leuchtmann, head of FX research
"Speculative market participants are not very happy with
these levels and look at it as a good opportunity to sell the
euro which is leading to the rapid drop in euro/dollar."
The euro's falls helped the dollar rise to a two-week high
against a basket of currencies, with its index rising to
The also reversed earlier gains against the yen to trade
down 0.4 percent at 113.51 yen, having earlier hit a
17-month low of 114.675 yen as expectations of more monetary
stimulus continued to pressure the Japanese currency.
Commerzbank's Leuchtmann warned the euro would be
susceptible to further losses in 2013 if concerns around the
Europe's debt crisis re-emerge.
"The long-term assumption that the euro zone crisis is over
is a bit shaky and was perhaps overdone. Many of the speculators
who increased their long euro positions in the last three months
don't have the appetite to carry these long positions into the
'FISCAL CLIFF' FOCUS
Investors were cautious as they waited to see the outcome of
a last-chance round of U.S. budget talks, with analysts saying
the dollar could benefit from safe-haven buying if no deal is
reached by year-end.
U.S. President Barack Obama will meet congressional leaders
from both parties on Friday to try to revive talks to avoid tax
hikes and spending cuts - together worth $600 billion - that
will begin to take effect on Jan. 1.
The dollar was steady against the yen at 86.07 yen,
edging away from an earlier peak of 86.64 yen, its strongest
since August 2010, when it stopped just shy of reported options
barriers at 86.75 yen and 87.00 yen.
Expectations the new Japanese government will push the Bank
of Japan to ease monetary policy further has weighed broadly on
the Japanese currency and analysts say it could fall further.
The yen's unabated slide, since Shinzo Abe took the helm as
Japan's prime minister on Wednesday, has seen it hit fresh
two-year lows for three days in succession. Abe has vowed to
press for aggressive monetary stimulus to fight deflation.
"Clearly there is some momentum in dollar/yen on
expectations the BOJ will become more expansionary and this is
currently weighing on the yen," said Marcus Hettinger, global FX
strategist at Credit Suisse.
The yen has fallen more than 12 percent against the dollar
in 2012, putting it on track for its biggest annual percentage
drop since 2005.
The dollar looked set to end the week above its 200-week
moving average, now around 84.95 yen, for the first time since
late December 2007, a technical signal indicating further gains.