FOREX-Dollar falls; investor focus returns to U.S. economy, Fed

Reuters

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

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

NEW YORK, Oct 17 (Reuters) - The dollar slid against a

basket of currencies on Thursday as a deal to end the U.S. debt

stalemate in Congress prompted investors to focus on the

economic impact of the government shutdown and the likelihood

that Federal Reserve stimulus will stay in place.

Analysts said the two weeks of uncertainty that knocked

investor and business confidence would have dented the growth

prospects of the world's largest economy.

That would likely keep the Fed 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.

In the first wave of data to be released after the

government returned to work, the Labor Department said the

number of Americans filing new claims for unemployment benefits

dropped from a six-month high last week..

"The U.S. dollar is the worst performing currency as

attention shifts from the U.S. debt debacle to incoming Fed

rhetoric," said Christopher Vecchio, currency analyst, at

FXCM-owned DailyFX.com in New York.

The dollar index was down 1 percent at 79.688, well

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

yen, it lost 0.9 percent to trade at 97.83 yen, pulling back

from a three-week high of 99.00 yen set much earlier in the

global day. The dollar trough on Thursday against the yen was

the lowest in a week and it was the largest percentage fall in a

month.

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 in London.

"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. Gold jumped 3 percent on Thursday

on the belief the Fed will delay tapering.

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.

Though not followed widely outside China, moves from other

ratings agencies will concern investors.

CARRY TRADES

The dollar's broad losses saw the euro rise 1 percent to

$1.3664 with a peak of 1.3681, its highest since early

February. It was the largest percentage gain in a month.

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 to

hit a four-month high. The New Zealand dollar soared to a

five-month high.

Of the 36 most actively traded currencies against the dollar

month to date, just four are lower, another 31 are higher

against the dollar and one unchanged.

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

favor 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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