FOREX-U.S. dollar flattened by rallying euro; kiwi flies


* Dollar index flounders at 8-month lows as euro rallies

* ECB, Italian politics support common currency

* Kiwi a standout performer thanks to hawkish-sounding RBNZ

By Ian Chua

SYDNEY, Oct 3 (Reuters) - The dollar languished ateight-month lows early in Asia on Thursday as the U.S.government shutdown dragged on, while positive developments inItalian politics and a watchful but patient European CentralBank helped lift the euro.

The common currency rose as high as $1.3608, a levelnot seen since early February, after Italian Prime MinisterEnrico Letta won a confidence vote in parliament as SilvioBerlusconi backtracked on threats to bring down the government.

Adding to the euro's momentum, the European Central Banksimply reiterated it was ready to use any policy option totemper market interest rates, but did not flag immediate action.

Indeed, JPMorgan analysts said there was nothing in ECBPresident Mario Draghi's comments that suggested the bank was"about to launch a major easing offensive."

"The ECB is in wait-and-see mode and is tolerant of arecovery that is modest and of inflation that is far belowtarget," they wrote in a client note.

They added that declines in money market interest ratessince the last ECB meeting have in part lessened the momentumfor new measures.

The euro last stood at $1.3581, with the latest pushbringing the currency near its 2013 peak of $1.3711 set on Feb.1. That, in turn, drove the dollar index to its lowest ineight months and towards its 2013 trough.

Against the yen, the dollar hovered near a five-week lowaround 97.14. The euro lost only a bit of ground to tradeat 132.37 yen after recovering from a low around131.39.

Traders said the dollar could make a comeback againstsafe-haven currencies such as the yen if a deadlock that hasshut down wide swaths of the U.S. federal government was broken.

President Barack Obama met with Republican and Democraticleaders in Congress on Wednesday but a solution seemed unlikelyas both sides dug in for what could be a long stalemate.

A notable mover was the New Zealand dollar, which ralliedbroadly after the Reserve Bank of New Zealand said largerincreases in interest rates would be needed if new limits onmortgage lending fail to cool the country's housing market.

The kiwi jumped to a high around $0.8340, pullingwell away from a two-week trough of $0.8194 plumbed onWednesday. It last traded at $0.8309.

Asia again has a dearth of economic news on offer forThursday, apart from a survey on China's services activity.

The latest reading on the Chinese manufacturing sector was abit of a letdown, so any further disappointment will only add toworries that a nascent recovery in the world's second-biggesteconomy may be foundering.

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