* 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 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
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.