* U.S. Congress approves deal to avoid "fiscal cliff"
* Euro/yen hits 18-month peak, euro/dollar eyes 9-month high
* Dollar/yen hits 29-month high, more weakness likely
* U.S. ISM factory activity index due 1500 GMT
By Anooja Debnath
LONDON, Jan 2 The yen fell to a 18-month low
against the euro while the dollar faltered against growth-linked
currencies on Wednesday after U.S. lawmakers passed a bill to
avoid a "fiscal cliff" of tax rises and spending cuts.
Traders said the passage of the bill removed a major
uncertainty hanging over markets in the near term, lifting
demand for riskier assets such as stocks and commodities and
triggering a sell-off in safe-haven government bonds.
Like the yen, the highly-liquid dollar - a currency bought
in times of market stress or economic uncertainty - came under
pressure and fell against the euro and the Australian dollar.
Further selling is expected to weigh on the dollar as
more investors with fresh budget allocations return after the
U.S. lawmakers approved on Tuesday a deal preventing huge
tax hikes and spending cuts that would eventually have pushed
the world's largest economy into recession.
That provided relief and the euro rose as high as 115.995
yen on trading platform EBS, its highest against the
Japanese currency since July 2011. After trimming gains, the
euro was up about 0.9 percent for the day at 115.48 yen, with
option barriers 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."
Strategists added that lingering concerns about spending
cuts, which were delayed for two months, and over the
government's borrowing limit have taken the back seat for now.
Markets will focus on the U.S. factory activity index for
December due 1500 GMT which is expected to show a slight
expansion in the sector. This could further boost risk sentiment
and keep the dollar under pressure, traders said.
The euro was up 0.5 percent at $1.3273, not far from
the 8-1/2 month high of $1.33085 hit on Dec. 19. Traders cited
stop loss buy orders above $1.3310 with option barriers at
$1.3360. Bids were seen at $1.3220/40.
Strategists warned that further gains in the euro could be
limited if concerns about the euro zone economy reemerge.
"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."
Despite falling to a two-week low versus the Australian
dollar and easing against the euro, the dollar rose
against the yen to 87.335, its highest since late July
2010. The dollar was last up 0.4 percent at 87.00 yen.
The increase in investor risk appetite after the budget deal
added to pressure on the yen, which has been hurt by
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.
But 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."
Speculators' bets against the yen hit more than five-year
peaks in December, but have eased in the past two weeks.
Nonetheless, the yen has hit a four-year low against the
higher-yielding Aussie and New Zealand dollars
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.