Dollar dips after fiscal cliff plan fails

THE Australian dollar has fallen to its lowest in two weeks, based on concerns about US debt, after a plan to raise taxes for millionaires divided Republicans in Congress.

THE Australian dollar has fallen to its lowest in two weeks, based on concerns about US debt, after a plan to raise taxes for millionaires divided Republicans in Congress.

Late on Friday, the currency was trading at US104.53¢, down from US104.91¢. It slipped to US104.38¢ during the session, to its lowest level since December 4.

US Republicans ditched a vote on a controversial "Plan B" proposed by the Speaker of the House of Representatives, John Boehner, as part of negotiations with the President, Barack Obama. The two are attempting to reach an agreement on measures to bring down the US's debt, while avoiding a "fiscal cliff" next year as Bush-era tax cuts expire and spending cuts come into effect.

Mr Boehner's plan allowed the tax cuts to expire for millionaires but extended for everyone else, while President Obama wants the cuts to expire for those earning more than $US400,000 ($382,720) a year.

A currency dealer at Easy Forex, Anthony Botros, said news of the Republican revolt over Plan B hurt sharemarkets and pushed down risk assets like the Australian dollar.

"We're seeing futures in the US heading into the negative considerably and that is causing risk aversion, which is further weighing on the Aussie dollar," he said.

Mr Botros said markets were worried the two parties would not reach a deal before the first of the fiscal cliff measures came into effect in early January.

"It does look like market sentiment is quite negative," he said. "Congress doesn't sit again until after Christmas so we are starting to cut it quite fine."

Meanwhile, bond futures prices have rallied on fears surrounding the US debt talks.

An interest rate strategist with UBS, Matthew Johnson, said global markets took a hit after the failure of the Republican plan.

"You saw an immediate move down in equity index futures and Aussie equities followed," he said. "Bond futures all rallied a bit."

The March 10-year bond futures contract was at 96.695 (implying a yield of 3.005 per cent), up from 96.660 (3.34 per cent) at Thursday's close. The three-year contract was trading at 97.280 (2.72 per cent), down from 97.250 (2.750 per cent).

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