* "Fiscal cliff" uncertainty dents growth-linked currencies
* Boehner fails to muster Republican support for his bill
* Thin year-end markets may exacerbate currency moves
By Anirban Nag
LONDON, Dec 21 The dollar rose against
growth-linked currencies on Friday after talks to resolve a U.S.
budget crisis stalled, fuelling concerns the world's largest
economy could be tipped into recession.
The dollar, however, lagged the yen, as investors trimmed
large short positions against the safe-haven Japanese currency
after the Bank of Japan this week increased its asset purchase
programme by less than some had expected.
Both the dollar and the yen, the most liquid currencies, are
likely to be in demand as long as the outcome of the U.S. budget
talks remains uncertain. Gains could be exacerbated in thin
market condition before the year end.
Republican lawmakers delivered a blow to their leader, House
of Representatives Speaker John Boehner, when they failed to
back a bill designed to extract concessions from President
Barack Obama in the "fiscal cliff" talks.
That threw into disarray attempts to reach an agreement to
avert $600 billion of tax hikes and spending cuts, due to kick
in within weeks, and boosted demand for the most liquid
government bonds and currencies.
The dollar index rose 0.20 percent to 79.405, with
near term resistance at its 200-week moving average of around
79.50. The dollar's rose significantly against growth-linked
currencies such as the Australian and New Zealand dollars.
"It was sudden and unexpected. People are still hopeful that
a deal will be clinched if not by end-December then early
January," said Beat Siegenthaler, currency strategist at UBS.
"The dollar's rise has been particularly sharp against the
Aussie and the kiwi. Its rise has not been across the board."
The dollar was down 0.4 percent at 84.05 yen, well
below its recent 20-month high of 84.62 yen. The yen also rose
against the euro, with the single currency down 0.5 percent at
Concerns over the budget impasse and its impact on U.S. and
global growth hurt demand for so-called high-beta currencies and
the euro. The euro was last down 0.3 percent at $1.3200.
"We have had a very good run in the euro and what we are
seeing at the moment is a little bit of profit-taking triggered
by disappointment in the fiscal cliff discussions," said Audrey
Childe-Freeman, head of FX strategy at BMO Capital Markets.
"This is a classic risk-off trading environment where the
yen did best, followed by the dollar and higher-beta currencies
IMPLIED VOLS RISE
The Australian dollar fell 0.6 percent to
US$1.0423, its lowest level since Dec. 4, while the New Zealand
dollar dropped 1.2 percent to US$0.8240.
A sudden drop in U.S. stock index futures as Boehner
cancelled a vote on his proposal also helped trigger a sell-off
in perceived riskier assets, said Jeffrey Halley, FX trader for
Saxo Capital Markets in Singapore.
In the options market, near-term implied volatility rose as
uncertainty about the U.S. budget talks grew.
Demand to hedge against excessive price swings usually rises
during times of financial uncertainty.
One-month implied volatility rose to 7.2 vols,
from around 6.8 earlier this week.
The rise reflected a jump in the volatility index for
European stocks as investors sought to hedge against
sharp corrections in shares.
Traders also reported demand for dollar/yen implied
volatilities. One-month dollar/yen volatility rose
above 8 vols from around 7 in the middle of the week.
Traders pared bets against the yen, which has been pressured
in recent weeks by expectations that a new Japanese government
will push the Bank of Japan into more forceful monetary easing.