GLOBAL MARKETS-U.S. debt deal hopes lift world shares, dollar fades

Reuters

* All eyes on Washington as progress seen over deadlock

* European, Asian stocks track Wall Street higher, yen

broadly lower

* Dollar fades on view Fed tapering could be delayed

* Gold, copper steady after weekly falls, oil holds gains

By Marc Jones

LONDON, Oct 11 (Reuters) - Firming hopes of a U.S. deal to

ensure the country does not default on its debt lifted world

shares for a second day on Friday and left the dollar on course

for its first weekly rise in five.

Republican lawmakers on Thursday offered a plan that would

extend the U.S. government's borrowing authority for several

weeks, staving off a default that could otherwise come as soon

as Oct. 17.

While no deal emerged from a meeting with the Democrats at

the White House, the two sides appeared ready to end a political

crisis that has shuttered much of the U.S. government for over a

week and dented Washington's image worldwide.

MSCI's world shares index, which tracks

stocks in 45 countries, was up almost 0.5 percent by mid-session

in Europe as a 0.4 percent rise by European shares

followed a rally in Asian and U.S. markets overnight.

Stock futures pointed to modest gains of around 0.1 percent

on Wall Street when trading resumes with investors expected to

be cooler after the S&P 500 on Thursday enjoyed its best

day since January.

One senior Republican politician said a U.S. deal could be

struck as early as Friday and Nick Beecroft, chairman of Saxo

Capital Markets, said he expected a short-term agreement which

would give 6 weeks of breathing space, by Tuesday at the latest.

"I think when we see an agreement on the debt ceiling we

will see the high in U.S. Treasury yields drift down due to

relief out of that and the stock market will probably do well,"

Beecroft said, adding there were other implications for

financial markets too.

"I think it lends even more support to what I am beginning

to feel, which is that tapering is not going to happen until

March. When the data eventually comes through, it will look so

subdued that there will be no way the Fed's hurdles (to start

stimulus withdrawal) would have been met by December."

That view saw the dollar slip back 0.2 percent

against a basket of currencies. However, gains made earlier in

the week left it on course for its first weekly rise since early

September.

German government bonds reversed their morning

gains too alongside U.S. Treasuries, as the sense of

relief in core debt turned into risk appetite and lifted euro

zone periphery debt from Italy to Greece in the process.

EURO FIGHTER

Just round the corner from the wrangling in the White House,

top officials and central bankers from the world's largest

economies were meeting at the IMF and World Bank's annual

meetings.

The meeting's main communique is due out later but U.S.

Treasury Secretary Jack Lew and Federal Reserve Chairman Ben

Bernanke assured their G20 counterparts at a dinner on Thursday

that a U.S. debt resolution would be reached in time.

In currency markets, the 'risk-on' mood was clear with

traditional safe refuge, the yen, sagging across the board,

particularly against higher-yielding currencies such as the

Australian dollar.

The dollar and euro each rose to 1-1/2 week highs against

the Japanese currency and were last at 98.30 yen and

133.23 respectively.

Despite some strong comments from European Central Bank head

Mario Draghi on Thursday stressing the bank's policy "easing

bias", the euro bolted back up to $1.3572 as the Fed

tapering questions hit the dollar, and it was stronger against

sterling too.

Despite the ECB's best efforts, the single currency has

muscled higher over recent weeks as signs of recovery in some of

the euro zone's most troubled economies have emerged.

"At the moment Draghi is talking the talk but not walking

the walk," said Jane Foley, a senior FX strategist at Rabobank.

"He's got nothing to back it up. Is he going to cut rates?

Probably not. Is there going to be another LTRO (long-term

refinancing operation) when banks are paying back the current

one?"

FLUID POLITICS

With U.S. data still heavily reduced due to the government

shutdown, investor attention focused on the start of the third

quarter U.S. earnings season as J.P. Morgan published its

results.

Commodity markets remained choppy. With the dollar steadier

after two days of gains, oil's rebound came to a halt at

$111.48 a barrel. Gold firmed at $1,290, though it looked

set for its second week of 1.5 percent-plus falls.

Struggling also was copper, one of the metals most attuned

to global growth. It put on 0.1 percent to $7,153.00 a

tonne, but the week's stresses left it heading for its biggest

weekly drop in a month.

Traders and economists warned that the U.S. fiscal crisis

remained delicate and any setback in resolving it could see

markets quickly turn tail.

"The situation is fluid, but it seems like progress is being

made on averting the worst-case scenario. But a short-term

solution should be met with short-term enthusiasm," analysts at

Nomura wrote in a client note.

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