London: World share gains stalled and the dollar rose on Thursday as investors grew concerned about political battles looming in Washington over spending cuts, following this week’s deal to avoid sharp US tax hikes.

The MSCI world equity index dipped from an 18-month high to be down 0.15% at 346.7 points, while the dollar hit a three-week peak against a basket of major currencies and oil prices fell.

Share index futures point to a weak start on Wall Street as well after stocks began the new year with their best day in over a year on Wednesday, when relief that lawmakers had reached a deal to prevent a fiscal crunch swept the markets.

President Barack Obama and congressional Republicans now face two more months of tough talks on spending cuts and an increase in the nation’s debt limit as the hard-fought deal to avert the “fiscal cliff" mainly covered taxes and delayed decisions on expenditure until 1 March.

“Of the three key issues—tax increases, spending cuts and the debt ceiling—policymakers have tackled just one," said Mouhammed Choukeir, chief investment officer at Kleinwort Benson.

“The fiscal cliff issue is unresolved. This is likely to increase market volatility, supporting safe-haven assets such as gold and some commodities," he said. “Paradoxically, as the US debt and deficit issues continue to make investors jittery, the dollar can be expected to remain a safe-haven asset."

The dollar was up 0.3% against a basket of major currencies at a three-week high of 80.12 on Thursday, although it slipped 0.4% against the yen to 87.14.

The euro, which had touched an eight-and-a-half month high against the dollar on Wednesday, was down 0.2% at $1.3162.

“The reality is that budget talks will continue for the next two months and could get sour," said Jane Foley, senior currency strategist at Rabobank. “We see the dollar index reclaiming some ground."

The prospect of more bitter US political battles in the next few weeks over the spending cuts also halted a sell-off in US Treasuries and safe-haven German government bonds.

US benchmark 10-year T-note yields were unchanged at 1.837%, while 10-year German cash bond yields were flat at 1.44%

Across Europe the main share indexes in Germany GDAXI, Britain FTSE and France FCHI were flat to 0.5% lower, having hit their own multi-month highs on Wednesday as part of the global rally in riskier asset markets.

Oil slips

The dollar’s strength and rising oil supplies pushed crude prices lower, with Brent slipping 0.5% to under $112 a barrel. US crude futures were down 53 cents at $92.59.

Analysts expect oil prices to drop in 2013 as supply outweighs demand especially after US crude production hit a 19-year high in 2012 and Russia pumped more oil to remain ahead of Saudi Arabia in production.

Gold followed equities lower to be down about 0.3% at $1,681 an ounce.

The precious metal hit its highest level in two weeks on Wednesday in the wake of the initial US fiscal deal adding to gains of around 7 percent in 2012—its 12th straight annual rise, marking one of the longest bull runs for a commodity.

“The deal to avoid a fiscal cliff has booted some problems into the long grass by a considerable distance, but there are still issues out there such as expanding the debt ceiling, which could prove to be difficult negotiations," said David Jollie, strategic analyst at Mitsui Precious Metals.

Growth outlook eyed

Thursday’s retreat across riskier asset markets might have been sharper but for data showing activity in China’s services sector and at US factories had expanded in December, brightening the outlook for global growth.

China’s official purchasing managers’ index for the non-manufacturing sector rose to a four-month high in December, adding to signs of a revival in the world’s second-largest economy.

Investors will now turn their attention to the December US employment report on Friday. This is expected to show modest job growth of around 150,000 compared with 146,000 in November. Reuters

Anooja Debnath and David Brough also contributed to this story.