GLOBAL MARKETS-Short-term rates pressured, dollar up on Fed minutes

Reuters

* Wall Street edges higher after Fed's September minutes

* Dollar makes gains on yen and Swiss franc

* Oil dips below $110, gold eases

By Barani Krishnan

NEW YORK, Oct 9 (Reuters) - Strains in short-term interestrates and funding markets increased on Wednesday as the battleover the U.S. debt ceiling heats up, but the dollar ralliedafter the Federal Reserve said the decision not to reduce bondpurchases in September was a close call for some policymakers.

On Wall Street, stocks edged higher, recovering some of theday's earlier declines, while high-performing technology stocksadded to recent losses amid an ongoing Washington standoff and alooming deadline to raise the U.S. debt ceiling.

Short-dated U.S. Treasury bill yields were higher onincreased concern over whether the government will raise thefederal borrowing limit by an anticipated Oct. 17 deadline.

Short-term repurchase markets - the plumbing of dailybanking operations - saw overnight interest rates rise to theirhighest in five months on similar fears.

The Federal Reserve's minutes from its September meetingshowed that most members of the central bank's policy committeethought they needed more evidence of sustainable economicprogress, though the Fed said it was a "relatively close call"for several voters.

"It's interesting that there would be such a heated debate,since it is painfully clear that the economy is still in such afragile state that the Fed can't start the tapering process,"said Todd Schoenberger, managing partner at LandColt Capital inNew York.

"Some were looking for improvements in data, but clearly theeconomy can't stand on its own without intervention. Betweenslow growth and the shutdown, it's clear we're in troubledtimes. I wouldn't expect any tapering for quarters from now."

On the release, the U.S. dollar rallied, with the dollarindex rising to 80.52, up 0.6 percent, and the eurofalling to $1.3489, down 0.6 percent on the day.

At 3:08 p.m. EDT (1908 GMT), the Dow Jones industrialaverage was up 57.92 points, or 0.39 percent, at14,834.45. The Standard & Poor's 500 Index was up 5.12points, or 0.31 percent, at 1,660.57. The Nasdaq Composite Index was down 8.63 points, or 0.23 percent, at 3,686.20.

The Treasury sold $21 billion in 10-year notes on Wednesday,the second sale of $64 billion in new coupon-bearing supply thisweek. It will also sell $13 billion in 30-year bonds onThursday.

The benchmark 10-year U.S. Treasury note was down 5/32, itsyield at 2.6558 percent.

The expected nomination of Janet Yellen to head the FederalReserve had a modest effect on markets, meanwhile, given thepolitical wrangling in Washington that could lead a U.S. debtdefault within the next few weeks.

The 67-year-old Yellen is seen largely sticking to BenBernanke's policies aimed at boosting economic activity.

"The markets are finding consolation in Yellen's expectednomination because that at least puts the monetary policy on amore certain, or at least, a more familiar path," said AnastasiaAmoroso, global market strategist at J.P. Morgan Funds in NewYork.

European shares hit a one-month low. The MSCI'sworld index was flat, recovering from a Sept. 9low.

DOLLAR UP, COMMODITIES DOWN

The dollar rose from an eight-month low against majorcurrencies, riding on the sentiment from Yellen's impendingnomination and hopes that U.S. lawmakers will eventually reachan agreement on the budget.

Congress must come up with a deal by Oct. 17, when TreasurySecretary Jack Lew has said the government will run out of moneyto pay its bills.

The euro fell 0.4 percent to $1.3522. Against theyen, the dollar rose 0.5 percent to 97.36 yen, movingaway from a two-month low of 96.55 touched on Tuesday.

Jane Foley, senior currency strategist at Rabobank, saidmarkets were wary that an eleventh-hour deal could drive dollarhigher and thus, no one wanted to be too short the currency.

"There are expectations that as soon as there is a deal inWashington there will be a relief rally in the dollar, so peopledon't want to be too short of the dollar," Foley said.

In commodities, global oil prices settled downalmost 2 percent at below $110 a barrel on concerns that thebudget deadlock would weigh on investor confidence, hurtingdemand for crude. The spot price of gold was down almost1 percent at $1,307 an ounce, after hitting a 1-week bottom atbelow $1,300.

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