GLOBAL MARKETS-Stocks, dollar pressured as US shutdown drags on

Reuters

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

* Obama meets congressional leaders, progress to be tough

* Stocks slip, bonds gain amid risk aversion

By Wayne Cole

SYDNEY, Oct 3 (Reuters) - The U.S. dollar stayed underpressure in Asia on Thursday in what looked likely to be anotherjittery session for stock markets as President Barack Obama metcongressional leaders to try and break a deadlock on the U.S.government shutdown.

So far investors have been wagering that some 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, as itcould lead to an unprecedented default by the United States, anoutcome the market assumes is unthinkable.

Both U.S. and European shares ended Wednesday with onlymodest losses, while the euro got a lift as the Italiangovernment survived a no-confidence vote and the head of theEuropean Central Bank made no effort to talk down the currency.

The Dow Jones industrial average eased 0.39 percent,while the S&P 500 was just a fraction lower. MSCI's worldequity index dipped 0.13 percent.

The dollar took another hit when the head of the FederalReserve Bank of Boston, Eric Rosengren, said the governmentshutdown could further delay a tapering of its asset-buyingprogram because of a lack of official data on the economy.

That only added to the swing in market expectations on thefuture course of U.S. interest rates, which has been dramatic.

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 2.62 percent, from aSeptember peak of 2.99 percent.

The dollar's diminishing yield advantage has seen it peeloff to a five-week low on the yen at 97.27. The eurohopped up three quarters of a cent to $1.3580, while thedollar index touched its lowest since February.

In contrast to the increasingly dovish outlook for U.S.rates, the ECB on Wednesday left interest rates unchanged andgave no hint it was considering further easing.

Also aiding sentiment on European assets was a victory for Italian Prime Minister Enrico Letta's government in a noconfidence vote, which ended fears that the euro zone'sthird-largest economy would be forced into new elections.

Italian shares and bonds both rose as it become clear thatformer Prime Minister Silvio Berlusconi would drop his attemptsto bring down the government, sending Milan's FTSE MIB shareindex up as much as 1.8 percent, before closing 0.7percent higher.

In commodity markets, the lower dollar tended to supportprices in choppy trading. Gold rebounded to $1,315.41 an ounce, so recouping most of Tuesday's sharp fall. Copperfutures added just over 1 percent.

Brent crude for November rose $1.14 to $109.08 abarrel. U.S. crude was off 28 cents early on Thursday at$103.83 a barrel, but that followed a jump of more than $2 onWednesday.

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