* U.S passes temporary spending, borrowing bills
* Relief rally short-lived on concerns over consequences
* Dollar index down, euro and yen gain
* European shares retreat from highs, Wall Street opensweaker
* Gold hits one-week high, oil slides
By Richard Hubbard
LONDON, Oct 17 (Reuters) - The dollar fell and Wall Streetopened lower on Thursday as relief over a U.S. budget deal gaveway to worries over the effects of the 16-day governmentshutdown and prospects of a re-run early next year.
The legislation signed overnight by President Barack Obamato fund the government until Jan. 15 and extend a debt ceilingdeadline to Feb. 7 did nothing to resolve the underlyingdisputes that led to the crisis in the first place.
"The U.S. can give a sigh of relief for now but the New Yearcould bring a dangerous sense of déjà vu," Luke Bartholomew,investment analyst at Aberdeen Asset Management, said.
Equity markets in the United States and Asia initiallywelcomed the last-minute deal which pulled the world's biggesteconomy back from the brink of a historic default, but the rallyran out of steam as the longer-term implications sank in.
The MSCI world equity index, tracking sharesin 45 countries, briefly touched a fresh five-year high, thoughEurope's broad FTSE Eurofirst 300 index shed 0.15percent by midday.
Wall Street opened lower on Thursday as investors turnedtheir focus away from events in Washington to the earnings ofheavyweight companies such as IBM. The Dow Jones industrialaverage fell 122.34 points, or 0.8 percent, to 15,251.49and the S&P 500 0.32 percent to 1,716 points.
"Markets had expected the can to be kicked down the road,and the can's been kicked down the road a little bit. We're notreally waking up in a radically new world," Bartholomew said.
"Had it all gone wrong, then the market reaction would havebeen very different."
FISCAL CLIFF II
The temporary nature of the agreement and longer-termworries that the debt ceiling risks would become a structuraldrag on the economy weighed heavily on debt markets, drivingTreasury prices higher.
The 10-year benchmark Treasury note yield, which movesinversely to the price, slipped to 2.62 percent from around2.68 percent late in New York, while U.S. Treasurybill futures gained 0.1 percent.
German government bond prices, which tend to rise in timesof uncertainty, tracked the U.S. Treasury market higher as well,sending the 10-year Bund yield down 4.3 basis points to 1.89percent.
"The market is increasingly confident that a reduction of QE(quantitative easing) is unlikely to be on the agenda until wellinto 2014. So that's given Treasuries a boost and that'sfiltered through to Bunds," Nick Stamenkovic, bond strategist atRIA Capital Markets, said.
The likelihood that the fiscal saga would mean a delay inthe start of the Federal Reserve's planned withdrawal of itsmonetary stimulus was strengthened by Dallas Fed PresidentRichard Fisher.
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 itwould cut its bond purchases. When that didn't happen theyswitched forecasts of scaling back to December, and now manyanticipate no action until next year.
By pushing back expectations of a Fed tapering, the dealencouraged traders to sell the dollar against the currencies ofnations perceived to have less accommodative policies.
This saw the greenback fall 0.9 percent against Japan's yento 97.88 yen, while the euro rose one percent to $1.3668. It also supported higher-yielding and growth-linkedcurrencies including the Australian and New Zealanddollars near recent highs.
Against a basket of currencies, the greenback had slippedone percent to 79.6 having earlier set a one-month highon initial relief that a full-blown crisis had been averted.
The weaker dollar and the likelihood of the Fed holding backon reducing its monetary stimulus also gave gold a big lift.
The spot gold price surged to a one-week high just over$1,320 per ounce, up 3.0 percent on the day, while theDecember COMEX gold futures contract touched a high of $1,320.50.
"Tapering will be postponed much further, so that's probablythe main aspect behind the current spike in prices," Commerzbankanalyst Daniel Briesemann said.
Brent crude declined 75 cents to $109.80 a barrel asof 1400 GMT, with investors reluctant to take on fresh positionsahead of a deluge of data expected to emerge as Washington getsback to business.
- Budget, Tax & Economy
- Wall Street