NEW YORK (Reuters) - The dollar rose against major currencies on Monday as growing concern Washington would fail to reach a last-minute deal to avert the "fiscal cliff" drove investors to the safe-haven U.S. currency.
U.S. Senate Majority Leader Harry Reid said on Monday, ahead of a midnight deadline, that congressional negotiators still needed to bridge differences to avoid the cliff and avert $600 billion in gradual tax hikes and spending cuts.
"Going over the fiscal cliff is temporarily positive for the U.S. dollar as it drives some risk aversion," said Camilla Sutton, chief FX strategist at Scotia Capital in Toronto.
"However the medium-term impact is U.S. dollar negative," she said. "The combination of aggressive Fed policy, the lack of a credible fiscal plan, a challenged political system and the impact of the fiscal drag should weigh on the dollar."
The euro was down 0.2 percent on the day at $1.3187, with selling accelerated just before the London close. Near-term support was seen around $1.3142, the low set on December 17, according to Reuters data. Any euro gains would be capped at $1.3308, the 8-1/2 month high on December 19, traders said.
The euro has gained 1.8 percent against the dollar this year, overcoming worries about a euro zone break-up and any sovereign debt defaults.
Sentiment toward the euro improved after the European Central Bank pledged to buy bonds of indebted peripheral countries. Positioning data showed speculators sharply reduced bets against the euro in the week ended December 24.
The euro rose 0.3 percent to 114.02 yen, below a 17-month high of 114.68 yen set on Friday. The euro has risen 15 percent against the yen in 2012, putting it on track for its biggest yearly percentage gain since it was launched in 1999.
The yen hit its lowest in more than two years versus the dollar on Monday and was on track for its largest annual drop in seven years, pressured by expectations of more monetary easing by the Bank of Japan.
The dollar was up 0.6 percent at 86.52 yen. It has risen as high as 86.66 yen, according to Reuters data, the highest since early August 2010.
On the year, the dollar is up 12.4 percent against the yen, the best annual gain since 2005.
With a new Japanese government led by Prime Minister Shinzo Abe expected to pursue aggressive monetary easing and heavy fiscal spending to beat deflation, analysts see the yen staying under pressure in 2013. Any drop in the dollar against the yen would likely to be limited.
Failure to reach a deal in U.S. budget talks could keep the dollar firm as investors seek refuge in the more liquid U.S. currency. Any progress in talks would be positive for riskier currencies such as the euro and Australian dollar.
Congress could pass legislation in 2013 that retroactively prevents the United States going over the fiscal cliff, an option that is viewed as politically easier.
"The markets have presumed now there will be some sort of a agreement around the middle route," said Neil Mellor, currency strategist at Bank of New York Mellon.
Mellor said a major selloff in growth-linked currencies on Wednesday, when trading resumes after the New Year's Day holiday, was unlikely as it would take a few days before volumes rise to normal levels and investors return with fresh annual allocations.
Many investors say the impact of the fiscal measures will only be felt gradually and that the U.S. economy does not face immediate catastrophe if a deal is not reached.
Additional reporting by Anooja Debnath in London; Editing by Jeffrey Benkoe