FOREX-Dollar up from 8-month low but shutdown, debt limit looms

Reuters

* Dollar near eight-month low on U.S. government shutdown

* Dollar bounces from 1-1/2-year low versus Swiss franc

* Prolonged U.S. government closure could postpone Fedtapering

* Euro falls from eight-month high

NEW YORK, Oct 4 (Reuters) - The dollar rose for the firsttime in six sessions against a basket of currencies on Fridaybut was still within striking distance of a recent eight-monthlow as the U.S. government closure and fears about a debtdefault kept investors cautious.

House Republicans met to plan their next move on the fourthday of a U.S. government shutdown that many fear will drag onuntil bickering Washington politicians reach a deal to raise thedebt ceiling and avoid a default.

Global financial markets have been shaken by the possibilityof a U.S. debt default, which would be the first in its historyif the U.S. Congress doesn't raise the nation's borrowing limit.It is believed the money runs out by Oct. 17.

The shutdown has already raised concerns the still fragileeconomic recovery is now in jeopardy of being derailed.

As the shutdown drags into the weekend, currency investorstook some of their profits made from a fourth consecutive weekof decline for the U.S. dollar off the table, thereby removingsome of the selling pressure on the greenback.

"To merit a significant extension in dollar longs you willprobably have to get some more positive jobs data and likelyhave to get a resolution on the government shutdown," said BrianDaingerfield, currency strategist at Royal Bank of Scotland inStamford, Connecticut.

Daingerfield remarked that the picture now for the greenbackis mixed, leaving it somewhat in limbo.

"Today's move is more of a position clearout. Obviously, thedollar has weakened quite a bit since the FOMC decision inSeptember and I think people may be taking advantage of thatdollar weakness by taking positions off the table heading intothe weekend," he said, referring to the U.S. Federal Reserve'sdecision not to slow down its pace of monetary stimulus.

The U.S. dollar index, which tracks the greenbackagainst a basket of six major currencies, last traded up 0.5percent at 80.145, rebounding from Thursday's eight-month low of79.627. The index lost 0.17 percent on the week, its fourthstraight week with a loss. The euro, which traded weaker,dominates the composition of the index.

The euro fell 0.5 percent to $1.3546, off Thursday'seight-month high of 1.3645. Still, for the week the euro gained0.23 percent on the greenback.

The dollar held gains versus the euro and sustained lossesagainst the yen after U.S. House Speaker John Boehner toldRepublicans in the House of Representatives that he will notrely on Democratic votes to pass a "clean" debt ceiling hikewithout spending cuts, lawmakers said.

Analysts predicted minor setbacks and some consolidation forthe euro going into the weekend after its recent ascent. Realmoney accounts were cited as main sellers of the pair taking itbelow the $1.3600 mark.

The greenback's gains were pronounced against the Swissfranc, rebounding from a 1-1/2-year low reached the previousday. The Swissie was weighed by news that Switzerland'sfinancial markets regulator is investigating several Swiss banksin connection with possible manipulation of foreign exchangerates.

The dollar rose 0.95 percent to 0.9074 francs.

The government shutdown led the U.S. Labor Department todelay the employment report for September, which was slated forFriday. No new date was set for the release of the data.

Thus, any confirmation of an improving labor market that theFed wants to see before cutting its stimulus will likely bedelayed, hurting the dollar. Two senior Fed officials saidmonetary policy was being kept easier to help offset the harmcaused by political fighting.

"So far markets have mostly treated (the governmentshutdown) as a U.S.-centric growth shock from fiscal/confidenceeffects, rather than as a tail-risk shock to market risk," saidDan Dorrow, foreign exchange strategist at Faros Trading.

"The present state of things is emerging marketrisk-positive as it keeps hyper-accommodative Federal Reserve stimulating flows into emerging markets," he said.

Meanwhile, the Bank of Japan kept rates on hold, as waswidely expected. The BOJ voted unanimously to maintain itspledge of increasing base money, or cash and deposits at thecentral bank, at an annual pace of 60 trillion ($617 billion) to70 trillion yen.

The dollar gained 0.2 percent against the yen at 97.41 yen, according to Reuters data.

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