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

Reuters

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

* Dollar weakens after soft service sector data

* Reuters poll has euro, yen and pound weakening

By Julie Haviv

NEW YORK, Oct 3 (Reuters) - The U.S. dollar fell for a fifthstraight session against a basket of major currencies onThursday, hitting an eight-month low on concerns over whatimpact the U.S. government shutdown will have on the globaleconomy.

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. However, the longer it drags on, a bigger negative impact on economic activity is expected.

Atlanta Federal Reserve Bank President Dennis Lockhart saida protracted shutdown would result in "some measurable impact"on fourth-quarter U.S. growth, at least.

A pronounced impact on the U.S. economy could delay atapering of the Federal Reserve's bond-buying program. The Fed'sextraordinary program of bond purchases is viewed negatively forthe dollar because it is tantamount to printing money, andtherefore a delay in tapering would continue to weigh on thedollar.

President Barack Obama met with Republican and Democraticleaders in Congress late on Wednesday to break the budgetdeadlock. But even with wide swaths of the government idle,there was no breakthrough and each side continues to blame theother for the impasse. Obama's healthcare law is at the centerof the dispute.

The dollar index, which tracks the greenback against sixcurrencies, hit a trough of 79.627, its lowest sinceFebruary. It last traded at 79.758, down 0.2 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 0.3 percent higher at $1.3617,not far from the session's peak of $1.3645, its highest sinceFeb. 4.

Currencies briefly extended gains versus the dollar onThursday after a shooting incident outside the U.S. Capital,exacerbating already tense markets given the shutdown.

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 over the federal government's borrowinglimit. Failure to raise the limit could result in a U.S. debtdefault, damaging not only the U.S. economy by the globaleconomy as well, International Monetary Fund chief ChristineLagarde said.

Friday's scheduled release of September's employment reportwill not happen because of the shutdown, the U.S. LaborDepartment said. No alternative date was given.

The dollar, nevertheless, barely reacted to data pointing toa recovering U.S. labor market. The number of Americans filingnew claims for jobless benefits edged higher last week butremained at 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 on an Italian government victory in aconfidence vote on Wednesday also helped.

According to a Reuters October foreign exchange poll, theeuro's strength will not last as growth remains weak; the yenwill weaken on more monetary stimulus from the Bank of Japan;and with 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 0.2 percent at 132.43 yen, while the dollar was down 0.1 percent at 97.26 yen. Earlier, it hit a five-week low of 96.92 yen,according to Reuters data.

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