GLOBAL MARKETS-Dollar dips, Treasuries jump as focus shifts to U.S. economy

Reuters

* U.S. government passes temporary spending, borrowing bills

* Relief rally short-lived as concerns over consequencesdominate

* Dollar index up against major currencies; gold jumps

* Wall Street stocks mixed after opening lower; global stockindex up

By Caroline Valetkevitch

NEW YORK, Oct 17 (Reuters) - The dollar fell and Treasuriesgained on Thursday as relief over a U.S. budget deal shifted tofocus over the effect of the 16-day government shutdown on theeconomy and prospects of a re-run early next year.

Analysts said economic weakness resulting from the shutdownand uncertainty over the next round of budget and debtnegotiations may keep the Federal Reserve from withdrawingmonetary stimulus at least until a few months into next year.

The legislation signed overnight by President Barack Obamato fund the government until Jan. 15 and extend a debt ceilingdeadline to Feb. 7, pulling the world's biggest economy backfrom the brink of a historic default, did little to resolve theunderlying disputes that led to the crisis in the firstplace.

The dollar index was down 1 percent at 79.700, welloff a one-month high of 80.754 struck on Wednesday. Against theyen, it lost 0.9 percent to trade at 97.83 yen, pulling backfrom a three-week high of 99.00 yen set earlier in the globalday. The dollar trough on Thursday against the yen was thelowest in a week and was the largest percentage fall in a month.

"The U.S. dollar is the worst performing currency asattention shifts from the U.S. debt debacle to incoming Fedrhetoric," said Christopher Vecchio, currency analyst, atFXCM-owned DailyFX.com in New York.

In the U.S. Treasury market, the 10-year benchmark Treasurynote was up 19/32, its yield down at 2.6013 percentfrom 2.67 percent on Wednesday, when yields also eased inanticipation of a debt ceiling deal.

Also, interest rates on ultra-short-term U.S. governmentdebt fell sharply. The government had been expected to exhaustits $16.7 trillion statutory borrowing limit on Thursday,raising the risk it would not meet benefit payments and debtobligations in coming days.

Fears that the Treasury Department might delay paying debtholders made some large money market funds shed holdings ofTreasury bills that mature in the second half of October intothe first half of November. These were seen as most vulnerableif the government could not increase its borrowing capacity intime.

The unease in holding these T-bills catapulted theirinterest rates to levels not seen in five years. The one-monthyields were briefly double the yields on two-year Treasury notes.

On Thursday, with prompt payment on short-term debt nowassured, rates on October U.S. Treasury bills due Nov. 14 last traded at 0.020 percent, down 13 basis pointsfrom late on Wednesday.

U.S. stocks were nearly flat, with disappointing resultsfrom top companies, including International Business Machines and eBay keeping a lid on the market.

On Wall Street, the Dow Jones industrial average wasdown 48.41 points, or 0.31 percent, at 15,325.42. The Standard &Poor's 500 Index was up 4.85 points, or 0.28 percent, at1,726.39. The Nasdaq Composite Index was up 12.31points, or 0.32 percent, at 3,851.74.

MSCI's world equity index, tracking sharesin 45 countries, touched a five-year high and was last up 0.7percent. European shares were up 0.1 percent.

FISCAL CLIFF II

The temporary nature of the agreement and longer-termworries that the debt ceiling risks would become a structuraldrag on the economy remained a worry.

The likelihood that the fiscal saga would mean a delay inthe start of the Fed's planned withdrawal of its monetarystimulus was strengthened by Dallas Fed President RichardFisher.

In remarks prepared for delivery to the Economic Club of NewYork, he said: "Kicking the can down the road for a few monthswill not solve the pathology of fiscal misfeasance thatundermines our economy and threatens our future."

Markets had expected the Fed to announce in September thatit would cut its bond purchases. When that did not happen, theyswitched forecasts to December, and now many anticipate noaction until next year.

By pushing back expectations of Fed tapering, the dealencouraged traders to the sell the dollar against the currenciesof nations perceived to have less-accommodative policies.

The weaker dollar and the likelihood of Fed holding back onreducing its monetary stimulus also gave gold a big lift.

Spot gold rallied to a high of $1,322.56 per ounce early in the U.S. session, up more than 3 percent on the day.

Oil prices declined, with Brent crude down $1.31cents at $109.28 a barrel and U.S. crude oil down $1.83at $100.46.

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