GLOBAL MARKETS-Dollar sandbagged by US politics, stocks put up a fight


* Dollar on defensive as US government stays shut, debtceiling looms

* Obama meets congressional leaders, but no progress made

* Stocks, bonds see silver lining in central bank stimulus

By Wayne Cole

SYDNEY, Oct 3 (Reuters) - The U.S. dollar sagged toeight-month lows on Thursday as the U.S. government shutdowndragged on with no end in sight, though share markets foundcomfort in expectations major central banks might now have tokeep monetary policy super-loose for longer.

Also helping sentiment was an upbeat survey on China's hugeservices sector, an antidote to a disappointing report onmanufacturing earlier in the week.

MSCI's broadest index of Asia-Pacific shares outside Japan swung 1 percent higher, with Taiwan, thePhilippines, Indonesia and India all sporting gains.

Japan's Nikkei recovered its early losses, whileAustralian shares added 0.5 percent. Futures for the S&P500 were barely lower while spreadbetters predictedsteady starts for bourses in the UK, Germany and France.

The resilience was impressive given a meeting between U.S.President Barack Obama and congressional leaders producednothing but blame and counter-blame, dimming hopes of an earlyend to the budget impasse.

So far, investors have been wagering that a deal would bereached in time to avoid lasting damage to the economy, althoughanother fight over the debt ceiling still looms.

The ceiling is far more important than the shutdown since itcould lead to an unprecedented default by the United States, anoutcome the market assumes is unthinkable.

"To the extent that we have never been in a situation wherethe debt ceiling has not been raised, there is a high degree ofuncertainty over how events will transpire," said Elliot Clarke,an economist at Westpac in Sydney.

"That said, what is plainly evident is that a protractedstalemate would have a significant impact on the US economy."

Already one effect has been to further cloud the outlook forwhen the Federal Reserve will start scaling back itsasset-buying programme.

Eric Rosengren, head of the Federal Bank of Boston, said onWednesday that the government shutdown could further delay atapering because of a lack of official data on the economy.

That only amplified the startling swing in market thinkingabout the future course of U.S. interest rates.

Just a month ago, the futures market had predictedthe Fed funds rate would be up around 1.465 percent by the endof 2015. Now it implies a rate of just 0.745 percent.

That in turn has helped drag yields on the benchmark 10-yearU.S. Treasury note down to 2.626 percent, from aSeptember peak of 2.99 percent.

In contrast to the increasingly dovish outlook for U.S.rates, the European Central Bank (ECB) on Wednesday leftinterest rates unchanged and gave no hint it was consideringfurther easing.

The dollar's diminishing yield advantage saw it peel off toa new eight-month trough against a basket of currencies at79.827. The euro in turn climbed to an eight-month highat $1.3625, bringing in sight the 2013 peak of $1.3711.

The dollar did gain some traction on the yen, but onlybecause Japanese investors were selling their currency foreuros. Thus while the dollar steadied at 97.65 yen, theeuro rose more than half a yen to 132.86.

A notable mover was the New Zealand dollar, which rallied after the Reserve Bank of New Zealand said larger increases ininterest rates would be needed if new limits on mortgage lendingfail to cool the country's housing market.

The kiwi jumped to $0.8308, pulling well away froma low of $0.8194 plumbed on Wednesday.

Trading was very choppy in commodity markets, though the lower dollar tended to support prices.

Gold steadied at $1,310.92 an ounce, havingbounced from a low of $1,278.24 on Wednesday. Copper futures held their gains to stand at $7,270.50 a tonne.

Oil prices edged off after a jump on Wednesday. Brent crudefor November eased 41 cents to $108.78 a barrel, whileU.S. crude slipped 47 cents to $103.63.

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