NEW YORK: The dollar and yen fell on Monday after US lawmakers approved a last-minute deal to avert huge tax rises and spending cuts, eroding demand for the US and Japanese currencies as safe havens.
The passage of the bill to avoid the "fiscal cliff" removed a major uncertainty hanging over markets in the near term, but some analysts cautioned the optimism could fade if US economic data later this week disappoints.
"The focus moves away from Washington D.C. and goes back to economic data. The market wants to see supporting data that growth is still intact," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management.
"I think we are a little vulnerable, frankly, because the uncertainty that surrounded December took a pretty serious slice off demand," he said. "If we see disappointing numbers over the next couple of days, you'll probably see the risk rally come back down."
The Institute for Supply Management is set to release its manufacturing data for December later on Wednesday. The ISM services data is due on Friday, the same day as the government payrolls data for last month.
The House of Representatives voted for a bill late on Tuesday that prevented $600 billion in automatic spending cuts and tax increases. Economists had feared such measures would push the US economy into recession.
The euro rose as high as $1.3299 on Reuters data, the highest in two weeks and not far from an 8-1/2-month high set on Dec. 19. It was last at $1.3248, up 0.3 percent.
Against the yen, the euro rose to 115.99 yen on Reuters data, the strongest since July 2011, and was last up 0.8 percent at 115.39 yen. Option barriers were 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."
Some strategists warned that further gains in the euro could be limited if concerns about the weak euro zone economy reemerge.
Euro zone factories sank deeper into recession in December, data showed on Wednesday.
Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) fell to 46.1 from November's 46.2. It has been below the 50 mark that divides growth from contraction since August 2011.
"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."
Higher-yielding and growth-linked currencies rallied. The Australian dollar rose 1 percent to $1.0499 after hitting a two-week high. The New Zealand dollar gained 1.1 percent to $0.8364.
The dollar rose 0.5 percent versus the yen to 87.07, having touched 87.33 yen earlier, the highest since late July 2010.
The yen has also come under pressure in recent weeks on 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.
Speculators' bets against the yen hit more than five-year peaks in December but have eased in the past two weeks. 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."
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.
Center>Copyright Reuters, 2013
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