* Dollar weighed by possible U.S. government shutdown
* Fed uncertainty also continues to weigh on dollar
* Speculators cut bets in favor of the U.S. dollar in latestweek
* Focus also on U.S. labor market data next week
By Julie Haviv
NEW YORK, Sept 27 (Reuters) - The dollar dropped across theboard on Friday, hitting a 7-1/2-month trough against thesafe-haven Swiss franc, dented by the prospect of a U.S.government shutdown next week and a lack of clarity over whenthe Federal Reserve will scale back stimulus.
The U.S. government braced for a possible partial shutdownof operations on Oct. 1 as Congress struggled to pass anemergency spending bill that Republicans want to use to achieveTea Party-backed goals, such as defunding the new healthcarereform law.
Congress also faces the hard task of raising the limit onfederal borrowing authority. Without a debt limit increase byOct. 17, Treasury Secretary Jack Lew has warned, the UnitedStates government would have a difficult time operating andpaying creditors.
The more immediate focus was the looming U.S budgetdeadline.
"As this deadline approaches, investors are stepping uptheir sale of dollars on the growing concern that a governmentshutdown will undermine the quality of U.S. assets and lead to aretrenchment in U.S. growth," said Kathy Lien, managing directorat BK Asset Management in New York.
The dollar index, which tracks the greenback against abasket of six major currencies, was last down 0.3 percentto 80.284, not far from a seven-month low of 80.060 struck afterthe Fed last week decided to maintain its bond-buying program at$85 billion a month.
On the week the index dropped about 0.2 percent, its thirdstraight weekly loss. For September it is down around 2.2percent.
Currency speculators cut their bets in favor of the U.S.dollar to the lowest net long in seven months in the latestweek, according to data from the Commodity Futures TradingCommission released on Friday.
The dollar fell to 0.9018 Swiss franc, its lowest sinceearly February, with the franc also boosted by solid Swisssentiment data. It was last down 0.5 percent at 0.9058.
"Month-end rebalancing and hedging activity are havingenough impact to move the dollar in an environment of limitedvolume," said Sebastien Galy, foreign exchange strategist atSociete Generale in New York.
Against the dollar, the euro rose 0.2 percent to $1.3518 . The euro dominates the composition of the dollar index.
"Some profit-taking in U.S. equities was likely behind therun-up on euro/dollar in the morning and this pressure is fadingas algorithms are not finding enough momentum to continue thebreak-out in euro/dollar," Galy said. "Next week's U.S. nonfarmpayrolls report will likely lead the dance for 10-year yields."
"Downward pressures may still initially support euro/dollar,before the market realizes it is priced for perfection, whereassigns of deflation for example in Spain express a differentreality," he said.
Sterling rose to $1.6137 against the dollar, aone-week high, after Bank of England Governor Mark Carney wasquoted as saying he saw no need for more bond-buying by thecentral bank given signs of recovery in the British economy.
CLOUDY FED OUTLOOK
Beyond the budget impasse and month- and quarter-end flows,investors are focused on the Fed's next meetings in October andDecember, with some expecting the U.S. central bank to hold offon reining in stimulus until early 2014 to make sure the U.S.recovery is firmly on track.
"While we maintain a positive medium-term outlook for thedollar, signs of more definitive upside momentum for thegreenback will have to wait until Washington has overcome itsbudget hurdles and until U.S. economic data suggests that theU.S. economy is sufficiently self-sustaining for quantitativeeasing to be reduced," said Jane Foley, senior currencystrategist at Rabobank in London.
The dollar fell to a one-week low against the yen afterJapanese Finance Minister Taro Aso said he was not thinking oflowering the effective corporate tax rate now. The remarkssurprised investors who had positioned for a weaker yen onexpectations of more fiscal stimulus to prop up the economy.
The issue of whether Japan will lower the effectivecorporate tax rate has been weighing on the yen, which has slidthis year on the back of Japanese Prime Minister Shinzo Abe'spush to reflate the economy through steps such as aggressivemonetary stimulus and pro-growth structural reforms.
"The government will likely implement some form of fiscalstimulus but clearly it won't include a corporate tax rate cutimmediately," said Derek Halpenny, European head of globalmarket research at Bank of Tokyo Mitsubishi.
The dollar fell as low as 98.07 yen and last traded down 0.7percent at 98.24 yen. On the week the dollar droppedabout 1.2 percent, its second straight weekly loss, according toReuters data.
- Budget, Tax & Economy
- government shutdown