* 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 hit a three-week high
against a basket of currencies while the euro plumbed its lowest
level since mid-December on concerns that further U.S. budget
wrangling could lie ahead.
Initial optimism about a deal to avoid steep U.S. tax rises
and spending cuts late on Tuesday pushed down the dollar,
particularly against riskier and growth-linked currencies. But
the euphoria quickly faded as worries about future budget talks
This gave the U.S. currency a lift, taking the dollar index
as high as 80.229, its strongest since Dec. 11. The
dollar is often favoured at times of market uncertainty and
strategists said it could see further gains 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 dollar's rise pushed the euro down 0.7 percent to
a three-week low of $1.3082 after stop-loss sell orders were
triggered below $1.3090, traders said. This took the euro well
below a peak around $1.3300 hit on Wednesday.
Highlighting market concerns that the deal left key U.S.
deficit issues unresolved, ratings agency Moody's Investors
Service said the United States needed to do more to protect its
Aaa debt rating.
Strategists also said the current weakness in the euro could
persist due to the weak fundamentals in the euro zone, on any
fresh debt concerns in the currency bloc and increasing
prospects of an interest rate cut by the European Central Bank.
The euro fell more than 1 percent on the day to
113.65 yen as investors took profits on its rise to an 18-month
high of 115.995 yen hit on Wednesday.
"Euro/yen at around 115 levels was starting to look a bit
overdone and the euro may actually lose ground against the yen
in the coming weeks. It's moved too far too fast," said Colin
Asher, senior economist at Mizuho Corporate Bank.
The low-yielding yen, which fell on Wednesday in the wake of
the U.S. deal, recovered 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 was down 0.6 percent at 86.82 yen after
rising as high as 87.36 yen earlier on Thursday on trading
platform EBS, its highest since late July 2010.
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 deflation.
But Mizuho's Asher said that although the dollar could
extend its gains against the yen it would not "go in a straight
line all the way up to 90 yen".
"There has to be some pull-backs and periods when people
think it is over-stretched."
The yen is likely to remain vulnerable until the BOJ's
policy meeting on Jan. 21-22.