Global stocks drop, dollar up as "cliff" deadline looms

NEW YORK Sat Dec 29, 2012 4:12am IST

1 of 4. An employee of a foreign exchange trading company looks at monitors as a television set shows Japan's incoming Prime Minister and the leader of Liberal Democratic Party (LDP) Shinzo Abe speaking in Tokyo December 26, 2012. The yen fell to a 20-month low against the dollar on Wednesday, buoying the benchmark Nikkei stock average, as Japan ushers in a new prime minister eager to pursue drastic stimulus steps to drive the country's economy out of deflation.

Credit: Reuters/Yuriko Nakao

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NEW YORK (Reuters) - World stocks declined, the dollar gained and U.S. shares fell for a fifth day on Friday as the White House and U.S. lawmakers closed in on the "fiscal cliff" deadline with no deal in place.

President Barack Obama and Democratic and Republican lawmakers met Friday as they faced just days to reach a budget deal to avert massive tax increases and spending cuts that could drag the U.S. economy, the world's biggest, into recession.

The two sides are attempting to smooth over sharp differences on raising taxes on the wealthiest Americans and cutting spending on politically sensitive social welfare programs such as Medicare and Medicaid. But investors were skeptical that a deal could be accomplished before the deadline.

The MSCI all-world share index .MIWD00000PUS was down 0.5 percent, and the pan-European FTSEurofirst 300 .FTEU3 ended down 0.6 percent.

In U.S. trading, the Standard & Poor's 500 Index .SPX was down 15.67 points, or 1.11 percent, at 1,402.43, marking a fifth straight decline for the longest losing streak in three months.

The Dow Jones industrial average .DJI was down 158.20 points, or 1.21 percent, at 12,938.11, while the Nasdaq Composite Index .IXIC was down 25.59 points, or 0.86 percent, at 2,960.31.

"There's a pretty good chance that we won't have something in hand by year-end," said Jonathan Golub, chief U.S. equity strategist at UBS, in New York. "It should be pretty obvious that that is now the majority case."

Golub, however, said investors were still counting on a deal that would avoid most of the tax hikes and spending cuts next year even if it does come after the deadline.

Allowing $600 billion of higher taxes and spending cuts to start in January would prevent U.S. debt spilling beyond a $16.4 trillion agreed limit. Analysts fear the measures could wipe as much as 4 percent off the country's growth rate.

Energy companies were among the biggest decliners on Wall Street, with shares of Exxon Mobil (XOM.N) down 2 percent at $85.10 and the S&P energy index .GSPE leading sector losses.

DOLLAR RISES

The U.S. dollar edged up to a two-week high against major currencies as investors waited to see if U.S. politicians can strike a last-minute budget deal.

"Headline risk is likely to remain a driver of FX markets in the near term," said Eric Theoret, FX strategist at Scotia Capital in Toronto.

An agreement on the U.S. budget would be viewed as positive for riskier currencies such as the euro and Australian dollar, while a deadlock is deemed positive for the safe-haven and highly liquid dollar.

Against a basket of currencies at 79.930, the dollar was last up 0.1 percent at 79.665 .DXY.

At the same time, expectations that Japan will inject new stimulus into its economy pushed the yen to yet another two-year low for a third straight day.

The dollar was steady against the yen at 86.06 yen, having earlier risen to 86.63 yen, its strongest since August 2010.

In the U.S. bond market, benchmark Treasury debt prices rose for a third consecutive session on safe-haven buying as the faded hopes for a deal on the fiscal cliff.

Benchmark 10-year notes traded 12/32 higher in price, with yields falling to 1.69 percent, marking the lowest in two weeks and down from 1.73 percent late Thursday. Benchmark notes posted their biggest daily dip in yield in over seven weeks and were down about 8 basis points on the week.

OIL EASES

U.S. February crude slipped 7 cents, or 0.08 percent, to settle at $90.80. Trade was choppy, awaiting news on the U.S. budget talks, but the market was pressured by data showing that fuel stockpiles rose sharply and crude stocks fell less than expected last week.

Brent February crude fell 18 cents, or 0.16 percent, to settle at $110.62.

In other commodity markets, U.S. gold futures for February delivery settled down $7.80, or 0.5 percent, at $1,655.90 an ounce in New York.

Traditionally a safe haven and inflation hedge that investors rush to in times of trouble, gold has lately behaved like a risk asset - often rising and falling with the stock market and sometimes following the dollar.

(Additional reporting by Robert Gibbons, Wanfeng Zhou, Barani Krishnan, Edward Krudy and Karen Brettel in New York; Editing by Kenneth Barry, Dan Grebler and Leslie Adler)

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