The yen tumbled on Monday in an otherwise quiet day as a continued deadlock in US budget talks left an undercurrent of uncertainty in markets ahead of the Christmas break.
Volume was light going into the holiday, with many traders already out on vacation. The US stock and bond markets closed early, while a number of global markets, including those in Germany and Italy, were closed.
The major mover was the yen, which fell to 20-month lows after incoming premier Shinzo Abe renewed pressure over the weekend on the Bank of Japan to adopt a 2 percent inflation target. The dollar rose 0.7 percent against the yen.
The FTSEurofirst300 closed down 0.1 percent while the MSCI index of global stocks was slightly lower, down 0.2 percent.
Global equities have been pressured by the political stalemate with respect to the US "fiscal cliff," a combination of tax hikes and spending cuts scheduled to take effect next year. Investors fear that if no deal is reached, it could push the US economy into recession, severely hurting global growth.
Some US lawmakers expressed concern on Sunday that the country would go over the cliff, and some Republicans charged that was President Barack Obama's goal. Talks are stalled with Obama and House of Representatives Speaker John Boehner out of Washington for the holiday.
"This will continue to erode confidence and continue to cause problems," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "I am sure they will come up with some patch like they always do... but it's concerning that they can't get their stuff together."
Although there is no official date for talks to resume, the two sides still have a few days after Christmas to find a compromise before the Jan. 1 deadline when the measures start to take effect.
The Dow Jones industrial average ended down 51.76 points, or 0.39 percent, at 13,139.08. The Standard & Poor's 500 Index was down 3.49 points, or 0.24 percent, at 1,426.66. The Nasdaq Composite Index was down 8.41 points, or 0.28 percent, at 3,012.60.
Currency markets were largely quiet. Against the backdrop of the "fiscal cliff" uncertainty, the dollar was less than 0.1 percent higher against a basket of major currencies while the euro was flat.
Activity in other assets was also subdued, with spot gold edging off a four-month low and February crude futures up 0.2 percent at USD 88.74 per barrel.
The benchmark 10-year US Treasury note was down 2/32, with the yield at 1.7772 percent.
For the year, the S&P 500 has risen about 13.5 percent. In the face of the budget uncertainty, many investors may opt to lock in gains for the year until there is resolution on that front.
Strong finishThe uncertainty over the US budget is threatening to sour what has been a strong second half of the year for equity markets. The FTSEurofirst 300 is up 20 percent since June while the Euro STOXX 50 has gained almost 30 percent. Both indexes are set to post their best annual performances since the post-Lehman crisis bounce of 2009.
Most European bond markets were already shut for Christmas. One of the few to be open was in Britain, where benchmark 10-year yields ticked higher. Still, investors are showing increasing appetite for European stocks. EPFR Global data reported that flows into equity funds have increased for the last 19 weeks.
"This year has been a year of transition, and now it's time to turn the page and move on, to start picking stocks again for the long term, companies exposed to the emerging consumer in places like Asia and Africa," said David Thebault, head of quantitative sales trading at Global Equities.
Others warn, however, that the euro zone crisis may still have some bite left. Elections are due next year in Italy and Germany, while Spain's government, companies and banks need to refinance huge amounts of debt.
"Policymakers in Spain will not be looking forward to the start of the year and January will probably be quite volatile in Europe," said ABN Amro economist Aline Schuiling. "The funding in the first quarter for Spain will be the test... Its deficit is now roughly the same as Greece's."
