* Near-term focus on U.S. fiscal cliff talks
* Highly liquid dollar favoured as investors shun risk
* Dollar/yen down from highest since Aug 2010 set on Friday
* But dollar still up nearly 12 pct vs yen in 2012
By Anooja Debnath
LONDON, Dec 31 (Reuters) - The euro fell against the dollar on Monday as growing concern U.S. lawmakers would not reach a deal in last-ditch budget talks prompted investors to seek refuge in the more liquid U.S. currency.
The euro was down 0.2 percent on the day at $1.3187, with near-term support seen around $1.3144, the low of Dec. 17. Any gains in the euro would be capped at $1.33085, the 8-1/2 month high hit on Dec. 19, traders said.
The U.S. Congress is scheduled to meet on Monday in a last- minute attempt to avoid the “fiscal cliff” -- $600 billion worth of tax hikes and spending cuts due to kick in from Jan. 1, that could tip the world’s largest economy into recession.
On Sunday, Democratic and Republican leaders in the Senate remained at loggerheads in talks and this soured market sentiment and buoyed the dollar.
However, given that budget talks have been dragging on for months, that the fiscal measures will have only a gradual impact and that many investors had priced in very little chance of a deal by year end, strategists said a major sell-off in growth-linked currencies and assets on Wednesday was unlikely.
“If we come in on Wednesday and don’t have a resolution I don’t think we will see a big risk-off move because investors aren’t positioning for a deal to be done by Wednesday,” said Michael Sneyd, FX strategist at BNP Paribas.
“The market seems to have almost taken into account the U.S. fiscal cliff discussions will go into the new year and investors seem to have taken off any risk-on positions before the holiday period.”
The safety of the dollar is favoured in times of financial uncertainty and deadlock in budget talks is likely to keep it firm against most major currencies. Any progress in talks would, however, be positive for stocks and riskier currencies such as the euro and Australian dollar.
The euro has gained 2 percent against the dollar this year. Sentiment towards the euro zone improved after the European Central Bank pledged to buy bonds of indebted peripheral countries to reduce their borrowing costs. P os itioning data released on Friday showed speculators sharply reduced bets against the euro in the week ending Dec. 24.
The euro was down 0.1 percent on the day at 113.50 yen , and below a 17-month high of 114.675 yen set on Friday. Despite the drop, the euro has risen roughly 14 percent against the yen in 2012, putting it on track for its biggest yearly percentage gain since the euro was launched in 1999.
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 of more monetary easing by the Bank of Japan.
The dollar was flat at 86.06 yen, staying below Friday’s high of 86.64 yen, which was the dollar’s strongest level versus the Japanese currency since August 2010.
As the year draws to a close, the dollar is up about 11.9 percent against the yen for 2012.
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 and any drop in the dollar against the yen likely to be limited.
“There will be some support towards the 82 yen level,” said Roy Teo, FX strategist for ABN AMRO Bank in Singapore, adding the dollar was likely to be supported before the BOJ’s next policy meeting on Jan. 21-22.
But some analysts say the yen may be due a near-term bounce, especially since currency speculators have already ramped up bets against the Japanese currency.