LONDON (Reuters) - The dollar fell on Wednesday after U.S. President Barack Obama's re-election for a second term was seen ensuring Federal Reserve quantitative easing will stay in place.
But analysts said the dollar's uptrend could resume if safe-haven flows are prompted by growing worries over the looming U.S. "fiscal cliff".
The country risks policy paralysis over a sharp fiscal tightening due to start next year unless a deal is reached in Congress to avert it.
The end of uncertainty about the election result lifted stocks and riskier currencies, helping the higher-yielding Australian dollar rise to its highest in nearly seven weeks and the Canadian dollar to a three-week peak.
The dollar was down 0.1 percent against a basket of currencies .DXY at 80.545, not far from Monday's two-month high of 80.843.
The euro was up 0.1 percent at $1.2825, having hit a high for the day of $1.28765, with traders looking to sell the single currency at higher levels as investors took a grim view given weaker-than-expected economic data and renewed concerns about Greece and Spain.
The euro risked coming under selling pressure on uncertainty before a Greek parliamentary vote on austerity measures necessary to secure the next tranche of bailout cash, without which the country faces bankruptcy [ID:nL5E8M6E9B].
"There's a bit of relief that there was a clear result in the U.S. presidential election, it's removed uncertainty which is benefiting pro-cyclical currencies in particular," said Ian Stannard, head of European currency strategy at Morgan Stanley.
"But this is likely to be short-lived, especially for the euro due to caution about Greece and Spain."
The Democrats retained a majority in the Senate but the Republicans held control of the House of Representatives, which could lead to tough negotiations over the "fiscal cliff", potentially prompting safe-haven flows into the dollar.
The initial reaction to Obama's re-election, however, was positive for equities and riskier currencies because the Republicans had expressed opposition to the Federal Reserve's quantitative easing policy.
The Australian dollar gained 0.4 percent to hit $1.0480, its highest since September 21, extending gains it made after the Reserve Bank of Australia surprised some market players by not cutting rates on Tuesday.
The U.S. dollar also fell against the Canadian dollar to C$0.9875.
Many were skeptical about the gains in riskier currencies given the looming fiscal problems in the U.S. could hurt growth in the world's largest economy. Riskier currencies are bought by investors when they are confident about an economic recovery.
"Beyond the initial reaction, the 'risk on' sentiment will be challenged at some point by the heightened fiscal cliff threat," David Bloom, global head of FX strategy at HSBC wrote in a note.
"We believe this may extend dollar's weakness, but will cap and potentially reverse the rally in "risk on" currencies we expect in the near term."
Against the yen the dollar fell to as low as 79.81 yen, well below its four-month high of 80.68 yen hit last week. It bounced back to 80.35 yen, flat on the day, as yields on U.S. Treasuries stabilized after a sharp drop. <US/>
Analysts at Morgan Stanley said they are maintaining their bullish strategy for dollar/yen and expected a re-test of the 80.70 high, with a break above their opening the way for gains towards their 84.00 target.
With the U.S. election out of the way, investors would turn their focus on the euro zone debt crisis in the near term.
The euro bounced from a two-month low of $1.2763 hit on Tuesday to rise back above its 200-day moving average, a key chart level, at $1.2827. But it stalled ahead of another chart indicator, the top of the daily Ichimoku cloud, around $1.2878.
Greece's coalition government hopes to overcome its own divisions to push through parliament on Wednesday the austerity package needed to avert bankruptcy.
Prime Minister Antonis Samaras is expected to narrowly win but the smallest party in his coalition will oppose the measures, leaving him with a margin of just a handful of votes.
Meanwhile, the market remained concerned that Spain could delay seeking international aid, which could weigh on the euro.
The European Central Bank will decide on interest rates on Thursday and while no change is expected, a slew of grim data out of the euro zone, including sluggish German industrial numbers, are likely to keep alive chances of further reductions.
(Additional reporting by Anirban Nag, editing by Ron Askew)