GLOBAL MARKETS-Dollar, stocks fall as U.S. spending deadline nears

Reuters

* Chance of U.S. government shutdown hangs over markets

* Dollar slides broadly, most major world stock indexeslower

* Oil falls in choppy trade

By Herbert Lash

NEW YORK, Sept 27 (Reuters) - Global equity markets fell andthe dollar hit a 7-1/2-month low against the safe-haven Swissfranc on Friday as the prospect of a shutdown of U.S. governmentoperations next week and a possible debt default several weekslater unsettled investors.

A lack of clarity over when the Federal Reserve will scaleback its stimulus program also weighed on the dollar. The Fedmust be patient in deciding when to trim its bond purchases, twoof its most dovish officials said, a week after the U.S. centralbank unexpectedly stood pat instead of tapering.

President Barack Obama said he would not agree to delayingor defunding the new healthcare reform law, that the Senateacted responsibly earlier in the day to keep the government openand that healthcare exchanges would open on Tuesday.

Obama also said that failure to raise the government's debtlimit would be far more dangerous than a shutdown, and wouldhave economic impacts domestically and around the world.

Washington braced for a partial shutdown on Oct. 1 asCongress tackled an emergency spending bill that Republicanswant to use to achieve Tea Party-backed goals, such as defundingthe Affordable Care Act.

As expected, the Senate passed a bill to fund governmentoperations from Oct. 1 to Nov. 15 and sent it to the House ofRepresentatives, where Republicans are considering attachingitems that could block the emergency funding.

"As this deadline approaches, investors are stepping uptheir sale of dollars on the growing concern that a governmentshutdown will undermine the quality of U.S. assets and lead to aretrenchment in U.S. growth," said Kathy Lien, managing directorat BK Asset Management in New York.

Congress also faces the hard task of raising the limit onfederal borrowing authority, which Republicans also aretargeting for controversial add-ons.

Without a debt limit increase by Oct. 17, Treasury SecretaryJack Lew has warned, the United States would have a difficulttime paying creditors and operating the government.

The cost of insuring against a U.S. default rose to its highest since May in the thinly traded market forcredit default swaps.

Investors would have to pay about $32,000 to insure $10million worth of Treasuries against default in five years, upfrom $22,000 a week ago.

Andre Bakhos, managing director at Janlyn Capital LLC inBernardsville, New Jersey, said that as the weekend approaches,tensions were mounting over the haggling in Washington.

"Until there's greater visibility, the market is going to bechoppy and erratic," Bakhos said.

The dollar fell against both the yen and the euro, as wellas the safe-haven Swiss franc. The dollar index was down0.34 percent to 80.253 against a basket of other majorcurrencies.

Most major stock indexes fell, with the exception ofBrazil's Bovespa index, which edged higher. Thebenchmark S&P 500 and Dow posted their first weekly drop infour.

MSCI's all-country world equity index fell0.15 percent, and the FTSE Eurofirst 300 index ofleading European shares fell 0.23 percent to close at 1,254.59.

The Dow Jones industrial average closed down 70.06points, or 0.46 percent, at 15,258.24. The Standard & Poor's 500Index fell 6.92 points, or 0.41 percent, at 1,691.75. TheNasdaq Composite Index slid 5.83 points, or 0.15percent, at 3,781.59.

Sterling rose to $1.6137 against the dollar afterBank of England Governor Mark Carney was quoted as saying he sawno need for more bond-buying by the central bank given signs ofrecovery in the British economy.

Economic data was mixed.

U.S. consumer sentiment slid in September to its lowest infive months as consumers saw higher interest rates and sluggisheconomic growth ahead, a survey showed.

The Thomson Reuters/University of Michigan's final readingon the overall index on consumer sentiment slipped to 77.5 inSeptember from 82.1 in August, the lowest final reading sinceApril.

U.S. household spending rose in August, however, as incomeswere buoyed by solid wage gains, suggesting growing momentum inthe U.S. economy despite months of reduced government spending.

American families spent 0.3 percent more last month than themonth before, in line with the median forecast in a Reuterspoll, Commerce Department data showed.

U.S. Treasuries prices rose on concerns about theimplications of a U.S. government shutdown.

Benchmark 10-year Treasury notes were up 10/32,their yields easing to 2.6099 percent.

Brent crude oil fell in volatile trading, marking its thirdstraight weekly loss, as diplomatic strides on Iran's nuclearprogram and Syria's chemical weapons drained the geopoliticalrisk premium from the markets.

Brent extended losses in post-settlement trading after Obamasaid he spoke with Iranian President Hassan Rouhani.

Brent crude oil for November settled down 58 centsat $108.63 a barrel.

U.S. crude futures for delivery in November fell 16cents to settle at $102.87 a barrel.

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