* 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
By Anooja Debnath
LONDON, Jan 2 (Reuters) - The yen fell to a 18-month low against the euro while the dollar struggled 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 weakness was expected in the U.S. currency as more investors with fresh budget allocations return after the holidays.
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 0.8 percent for the day at 115.44 yen, with option barriers cited at 116 yen.
The euro was up 0.6 percent at $1.3280, 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 $1.3350.
“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.”
He 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.
“Those issues are off the agenda for a couple of months and markets will remain risk-tolerant and that will be dollar negative,” Cole added.
The dollar rose to 87.335 yen, its highest since late July 2010. The dollar was last up 0.5 percent on the day at 87.08 yen.
The yen’s slide started earlier in Asian trade on Wednesday as it became increasingly likely that the “fiscal cliff” would be avoided.
The increase in investor risk appetite 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.
“I would think there is more scope for yen weakness,” said Sim Moh Siong, FX strategist for Bank of Singapore, adding that one caveat to this happening was the unresolved U.S. debt ceiling.
Some strategists said that for yen weakness to persist, the Japanese government would need to deliver on its promises of pushing for aggressive monetary easing.
“What we see now is the yen being heavily sold on expectations that there will be material change in policy,” RBC’s Cole said.
“I don’t want to bet against yen weakness in the near term but in the long term I still have my reservations of what can actually be achieved with policy in Japan. Eventually some of this short yen positioning might unwind and dollar/yen could fall back.”
Speculators’ bets against the yen hit more than five-year peaks in December but have eased in the past two weeks.