* Euro falls vs firmer dollar as risk appetite fades
* Euro/yen pulls away from previous day's 18-month high
* Dollar/yen pauses after hitting 29-month peak
By Anooja Debnath
LONDON, Jan 3 The dollar rose broadly and the
euro fell on Thursday as optimism sparked by a deal to avoid
steep U.S. tax rises and spending cuts gave way to concerns more
budget wrangling could lie ahead.
The dollar index rose 0.1 percent at 79.883, having
hit a three-week high of 80.088 in Asian trade.
U.S. lawmakers narrowly avoided the potentially
recession-inducing tax hikes and spending cuts late on Tuesday,
triggering a rally in equities and pushing down the dollar in
favour of riskier and growth-linked currencies.
But the dollar, often favoured at times of market
uncertainty, rebounded on Thursday as initial exuberance gave
way to scepticism. Markets focused on the challenges ahead, with
fresh talks on spending cuts and a rise in the limit on U.S.
borrowing set for the next two months.
Analysts said this could lift the dollar in coming weeks.
"The reality is that budget talks will continue for the next
two months and could get sour," said Jane Foley, senior currency
strategist at Rabobank.
"There could be a messy two months ahead and we see the
dollar index reclaiming some ground."
The euro was down 0.2 percent on the day at $1.3162,
well below a peak around $1.3300 hit on Wednesday.
Traders reported offers up to $1.3175, though they also said
central bank demand for euros was capping its fall.
The dollar rose to a three-week high against the Swiss franc
of 0.92155 francs, with weak Swiss KOF sentiment data
also weighing on the franc.
The low-yielding yen, which fell on Wednesday in the wake of
the U.S. deal, edged up against the dollar but remained near a
29-month low and looked fragile on expectations the Bank of
Japan will ease monetary policy further.
The dollar slipped 0.2 percent to 87.18 yen after
rising as high as 87.36 yen earlier on Thursday on trading
platform EBS, its highest since late July 2010.
"Technically dollar/yen looks somewhat overbought here. It's
gone a long way in a very short time," said Callum Henderson,
global head of FX research for Standard Chartered Bank in
Singapore, adding that the dollar could see some consolidation
in the near term before heading higher.
"Over the next few months, I think the bias is still for a
higher dollar/yen rate," he said.
The euro also pulled away from an 18-month high against the
yen of 115.995 yen on EBS on Wednesday and was down
0.4 percent on the day at 114.68 yen.
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 BOJ into further monetary easing to beat
The yen is likely to remain vulnerable until the BOJ's
policy meeting on Jan. 21-22.