FOREX-Dollar falls as investor focus shifts to U.S. economy, Fed

Reuters

* U.S. House, Senate pass bill to avert debt default

* Dollar index down 0.7 percent, U.S. bond yields down

* U.S. currency pulls back from 3-week high against yen

By Anirban Nag

LONDON, Oct 17 (Reuters) - The dollar fell against a basket

of currencies on Thursday as investors marked a deal to end the

U.S. debt stalemate by focusing on the economic impact of the

government shutdown.

Analysts said the two weeks of uncertainty that knocked

investor and business confidence would have dented the world's

largest economy's growth prospects.

That would keep the Federal Reserve from withdrawing

monetary stimulus at least until the beginning of next year. As

such, U.S. Treasury yields slipped and

dragged the dollar down against most major currencies, including

the yen.

Adding to the dollar's woes was Chinese rating agency

Dagong, which downgraded the United States to A- from A and

maintained its negative outlook.

The dollar index was down 0.75 percent at 79.877,

well off a one-month high of 80.754 struck on Wednesday. Against

the yen, it lost 0.8 percent to trade at 97.95 yen, pulling back

from a three-week high of 99.01 yen set earlier in the day.

The dollar lost momentum after rising initially in

anticipation of an end to the fiscal impasse, falling to lows

versus the yen after the U.S. House of Representatives approved

a deal already passed by the Senate.

The deal offers only a temporary fix and does not resolve

the fundamental issues of spending and deficits that divide

Republicans and Democrats.

"We would expect this impasse to shave off part of

fourth-quarter growth and hurt consumer confidence especially

from the government sector," said Simon Derrick, head of

currency strategy at BNY Mellon.

"What this does is push back expectations of Fed tapering to

early 2014 and this is dollar negative."

The Fed's Beige Book report on Wednesday suggested

confidence had been dampened somewhat by uncertainty caused by

budget battles in Washington.

CARRY TRADES

The dollar's broad losses saw the euro rise 0.7 percent to

$1.3638 not far from a eight-month high of $1.36465

struck on Oct. 3.

It also pushed growth-linked currencies including the

Australian and New Zealand dollars to fresh

multi-month highs.

The Australian dollar rose past reported option barriers at

$0.9600 to hit a four-month high of $0.9603. The New Zealand

dollar soared to a five-month high of $0.8467.

With implied volatilities - a gauge of

how choppy currency moves are likely to be - anchored, and

expectations that Fed is likely to keep pumping in dollars at

$85 billion a month, analysts said conditions were turning in

favour of dollar-funded carry trades.

In carry trades, investors borrow in a low yielding currency

to buy a higher yielding or riskier one to earn better returns.

"With soft but positive economic growth, and investors ever

more confident that a Fed exit isn't around the corner, we

remain skewed towards selective bullish risk positions," Societe

Generale analysts said in a note. "They are a green light for

risk takers to position for a recovery of the G-10 carry trade."

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