* Dollar near 8-month trough on U.S. government deadlock
* Prolonged U.S. government shutdown could postpone Fedtapering
* Euro trades near 8-month high, sees minor setbacks
By Anooja Debnath
LONDON, Oct 4 (Reuters) - The dollar traded near aneight-month low on Friday as the U.S. government shutdowndragged on, while the euro held near its highest level sinceFebruary after a run of supportive economic data.
The U.S. currency was on track for its fourth consecutiveweek of losses against a basket of currencies. Its index was marginally up by 0.2 percent at 79.910, but still close toThursday's trough of 79.627, its lowest in eight months.
The euro was down 0.2 percent at $1.3595, havingtouched a peak of $1.36465 on Thursday, its highest sinceFebruary when it scaled this year's high of $1.3711. It hasrisen 0.5 percent on the dollar so far this week.
Analysts predicted minor setbacks and some consolidation forthe euro going into the weekend after its recent ascent. Realmoney accounts were cited as main sellers of the pair taking itbelow the $1.3600 mark.
The dollar saw little respite this week with marketsconcerned that the U.S. impasse would merge with a more complexfight over raising the U.S. debt limit later this month. Failureto do so may lead to a historic debt default.
Adding to the greenback's woes was data on Thursday thatshowed growth in the U.S. service sector had cooled last month.
"No one wants to touch the dollar while we haveuncertainties regarding the U.S. government shutdown. We alsohad a disappointing service sector number and that also added tothe negative dollar sentiment," said Niels Christensen, FXstrategist at Nordea.
U.S. Labour Department on Thursday said the employmentreport for September will not be released as scheduled on Fridaydue to the government shutdown. No new date was set.
Thus, any confirmation of an improving labour market thatthe Federal Reserve wants to see before cutting its stimulus,will likely be delayed, hurting the dollar. Two senior Fedofficials said monetary policy was being kept easier to helpoffset the harm caused by political fighting.
"Those who have been expecting (Fed tapering) in Octobershould be having a bit of panic now. Those who have bet onDecember may be worried too," said Katsunori Kitakura, associatemanager of market making at Sumitomo Mitsui Trust Bank.
The dollar's weakness helped support the euro.
The resolution of Italy's latest political crisis, theEuropean Central Bank refraining from any immediate policyaction to help the economy and this week's data all supportedthe euro.
But Sara Yates, global currency strategist at JPMorganPrivate Bank said the prospect of the Fed eventually trimmingits bond purchase programme could push the benchmark U.S.10-year Treasury yields to 3.0 percent or highernext year and support the dollar.
At the same time "sentiment towards Europe will likelyimprove but the ECB will stand ready to ease policy to stopfinancial conditions from tightening too much," she said, addingin such a case the euro could target the $1.28 mark.
The dollar was flat against the yen at 97.19 yenafter the Bank of Japan kept rates on hold as was widelyexpected.
- Europe News