FOREX-Dollar stumbles to 8-month low as U.S. gov't shutdown lingers on

Reuters

* Dollar index at 8-month lows as euro extends gains

* Dollar weakens further after soft service sector data

* Reuters poll has euro and yen and pound weakening

* ECB and improved data support common currency

By Julie Haviv

NEW YORK, Oct 3 (Reuters) - The U.S. dollar fell for a fifthstraight session against a basket of major currencies onThursday, dropping to an eight-month low, on concerns about theramifications of a lingering U.S. government shutdown.

If the partial U.S. government closure, the first in 17years, ends soon, it is expected to have a limited effect on theU.S. economy, but economic fears will grow if the shutdown dragson.

A pronounced impact on the U.S. economy from the shutdowncould delay a tapering of the Federal Reserve's bond buyingprogram. The Fed's purchases are seen as negative for the dollarbecause they are tantamount to printing money, so a delay intapering cause cause the dollar to drop.

President Barack Obama met with Republican and Democraticleaders in Congress late Wednesday to break the budget deadlock,which has shut down wide swaths of the government, but there wasno breakthrough and each side blamed the other. Obama'shealthcare law was at the center of the impasse.

The dollar index, which tracks the greenback against sixcurrencies, hit a trough of 79.627, its lowest sinceFebruary. It last traded at 79.648, down 0.3 percent on the day.The euro is the dominant component of the index.

"The euro has become the new safe haven in thisenvironment," said Steven Englander, head of G10 strategy atCitiFX, a division of Citigroup, in New York.

"The situation in Washington has left the dollar vulnerableacross the board and its underperformance against other majorslike the euro is here to stay for the time being," he said.

The euro rose to an eight-month high against the dollar,supported by the weak U.S. data, apparent lack of concern by theEuropean Central Bank about the currency's recent strength andbetter-than-expected euro zone data.

The euro last traded 0.5 percent higher at $1.3638,not far from the session's peak of $1.3645, its highest sinceFeb. 4.

Along with concerns about the government's closure, the dollar was weighed down by U.S. data showing growth in theservices sector cooled last month as the pace of new ordersdipped and hiring slowed.

The U.S. government standoff comes a few weeks ahead of thenext political battle, one over the federal government'sborrowing limit. Failure to raise the limit could result in aU.S. debt default.

Not increasing the U.S. debt ceiling could damage not onlythe United States but the rest of the global economy,International Monetary Fund chief Christine Lagarde said.

Meanwhile, the U.S. Labor Department said the government'semployment report for September will not be released asscheduled on Friday because of the government shutdown. A newrelease date had not yet been set.

The dollar, nevertheless, barely reacted to data pointing toa healing labor market. The number of Americans filing newclaims for jobless benefits edged higher last week but remainedat pre-recession levels.

Higher-than-expected retail sales, a recovery in the eurozone services sector and a jump in Italy's services sector allunderpinned the single currency.

Political stability achieved when the Italian government wona confidence vote on Wednesday also helped.

The euro continued to be buoyed by comments made by ECBPresident Mario Draghi, who on Wednesday after the ECB's monthlypolicy meeting appeared to show little concern about the euro'sstrength.

There were expectations that Draghi would talk the euro down by showing a readiness to offer more long-term loans tobanks to keep money market rates from rising. Looser moneymarket conditions and low rates make it less attractive to holda currency.

"President Draghi's appearance is characterized by what hedid not say, with little to contain the euro appreciationtrend," said Tom Levinson, currency strategist at ING.

"Euro/dollar is primed for a test of its Feb. 1 high at$1.3711, levels the ECB back then was not prepared to accept."

According to a Reuters October foreign exchange poll, theeuro's strength won't last as growth remains weak; the yen willweaken on more monetary stimulus from the Bank of Japan; andwith the Bank of England's rate guidance still in doubt, thepound will fall.

The U.S. dollar is favored by IHS, a top forecaster.

More than 100 strategists were surveyed for the poll.

Against the yen, the euro was up 0.3 percent at 132.48 yen, while the dollar was down 0.1 percent at 97.24 yen, not far from the previous day's five-week low of97.12 yen, according to Reuters data.

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