FOREX-Dollar in the doldrums as Washington woes drag on

Reuters

* Dollar index still in sight of 8-month lows

* Investors show little conviction, currencies trapped intight ranges

* No resolution yet to U.S. budget talks, debt ceiling risklooms

* FOMC minutes next in focus

By Ian Chua

SYDNEY, Oct 9 (Reuters) - The U.S. dollar languished near atwo-month low against the yen in Asia on Wednesday and stayedclose to a recent eight-month trough on a currency basket withinvestors growing anxious as the U.S. budget impasse dragged on.

Hopes are fast fading that a resolution will be reachedbefore the mid-October deadline when Congress must decidewhether to raise the government's borrowing limit or face therisk of an historic debt default.

Given the uncertainty, investors are loathed to take bigpositions, keeping the major currencies in a tight range.

The dollar index last traded at 79.929, havingheld steady on Tuesday. However, it remained near lastThursday's trough of 79.627, a low not seen since earlyFebruary.

Against the yen, the greenback fetched 96.87 not farfrom an eight-week low of 96.55 plumbed on Tuesday. Immediatesupport is seen around 96.78, the 200-day moving average. Theeuro bought $1.3591, having dipped 0.1 percent overnight.

"It seems increasingly likely that the impasse in Washingtonis going to persist up to or even beyond the October 17 softdeadline for raising the debt ceiling, implying near-term risksto the downside for the USD," analysts at BNP Paribas wrote in aclient note.

"We think USD/JPY is particularly vulnerable in light ofstretched short yen positioning and the yen's structuraltendency to perform well in periods of elevated risk aversionand market stress."

While there is no major panic in financial markets yet, anincreasing sense of desperation is starting to emerge in someareas, such as the U.S. Treasury bill market.

Normally an uneventful event, the sale of one-month bills onTuesday turned into a near-boycott with investors demanding thehighest yields in five years as fears intensified over apossible default.

Traders expect the dollar to underperform safe-havencurrencies like the yen and Swiss franc in the event of a U.S.default, but suspect emerging market currencies will be hit evenharder.

A senior U.S. Treasury official called on Congress tore-open the government and raise the debt ceiling or riskhurting the United States' international reputation as a safehaven and stable financial center.

The IMF chief economist warned a failure to lift the debtceiling would lead to dramatic cuts in government spending and"probably ... a lot of financial turmoil."

So far, there is no sign of a breakthrough in Washington.President Barack Obama said he would be willing to negotiate onbudget issues only after House Republicans agree to re-open thefederal government and raise the debt limit with no conditions.

House Republicans said they would insist ondeficit-reduction talks with Obama as a condition for raisingthe federal debt limit.

Investors will also be keeping an eye on minutes of theFederal Reserve's September meeting, when the central bankcaught markets offguard by maintaining its bond-buying stimulusprogramme.

Given the current budget impasse and growing danger of theU.S. economy slipping back into recession, it would seem the Fedhad acted with impressive foresight at the Sept. 17-18 meeting.

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