By Marc Jones
LONDON (Reuters) - The dollar hovered at an eight-month low on Thursday as the U.S. government shutdown dragged on, though stocks drew comfort from the view that major central banks may now have to keep monetary policy super-loose for longer.
Solid euro zone data and an upbeat survey on China's huge services sector also lifted sentiment, which helped offset some disappointing manufacturing figures earlier in the week.
Markit's euro zone services Purchasing Managers Index, a monthly survey of businesses, rose to 52.2 in September from August's 50.7, while retail sales in the bloc posted their second robust monthly rise on the trot.
That left the euro pushing a new 8-month high against the dollar, which was sapped by the lack of progress in U.S. budget talks.
Wall Street was expected to open lower, with stock futures indicating falls of around 0.2 for the S&P 500 and Dow Jones industrial, raising the prospect of a ninth session in eleven in the red for both indexes.
World stocks were holding up overall however. Asian shares ex-Japan ended 0.1 percent higher and European stocks hovered unchanged at mid-session as London's FTSE helped offset weakness in Paris and Madrid.
"The U.S. fiscal uncertainty is still the main thing that is weighing on stocks," said Societe Generale strategist Alvin Tan.
On the dollar's weakness and the euro's rise, he added that a combination of factors were in play.
"It was a bit of a follow-on from the ECB meeting yesterday where Draghi - we think wrongly - was perceived by the market as giving the green light to euro strength. And this morning we have had some good data."
A meeting between U.S. President Barack Obama and congressional leaders on Wednesday produced only blame and counter-blame, dimming hopes of an early end to the budget impasse.
So far, investors have been betting a budget deal would be reached in time to avoid lasting damage to the economy, although a potentially riskier fight over the U.S. debt ceiling looms.
Philip Marey, a senior U.S. economist at Rabobank, said worries will only intensify the nearer Washington gets to the Oct 17 deadline when it will effectively run out of cash - raising prospects of an unprecedented default which the market for now assumes is unthinkable.
"I think at the most 100 basis points (drop in Treasury yields) but more likely 70 or 80 basis points." For stock markets like the benchmark S&P 500. "It could be something like 100 points," he added.
Already one effect has been to further cloud the outlook for when the Fed will start scaling back bond purchases.
Eric Rosengren, head of the Federal Bank of Boston, said on Wednesday that the government shutdown could further delay a tapering because of a lack of official data on the economy.
That only amplified the startling swing in market thinking about the future course of U.S. interest rates. Just a month ago, the futures market had predicted the Fed funds rate would be up around 1.465 percent by the end of 2015. Now it implies a rate of just 0.745 percent.
That in turn has helped drag yields on the benchmark 10-year U.S. Treasury note down, with them last at 2.6428 percent, from a September peak of 2.99 percent.
Bund yields, which move inversely to prices, inched up in trading thinned by a German public holiday while most other euro zone yields also edged higher.
In contrast to the increasingly dovish outlook for U.S. rates, the European Central Bank (ECB) on Wednesday left interest rates unchanged and gave no hint it was considering any imminent policy easing despite insisting the option remains.
The dollar's diminishing yield advantage saw it slide to a new eight-month trough against a basket of currencies going as low as 79.740 before clawing back to last trade at 79.840.
At the same time the euro climbed to an eight-month high at $1.3625, bringing in sight the 2013 peak of $1.3711 though it had settled back at $1.3600 ahead of U.S. trading.
"At face value, the commentary from the ECB sounded rather dovish," said BNP Paribas economist Ken Wattret. "It was apparently not dovish enough, however, with markets continuing to view the ECB's position as one of 'all talk and no action'."
KIWI SHOOTS UP
The dollar did gain some traction on the yen, but only because Japanese investors were selling their currency for euros. Thus while the dollar steadied at 97.61 yen, the euro rose more than half a yen to 132.88.
A notable southern hemisphere mover was the New Zealand dollar, which rallied after country's central bank said larger increases in interest rates would be needed if new limits on mortgage lending failed to cool the country's housing market.
The kiwi jumped to $0.8308, pulling well away from a low of $0.8194 plumbed on Wednesday.
Trading was very choppy in commodity markets, though the lower dollar tended to support prices.
Gold steadied at $1,310 ounce, having bounced from a low of $1,278.24 on Wednesday while Copper futures wobbled after gains in Asia to stand at $7,255.50 a tonne.
Oil prices held their ground after a jump on Wednesday. Brent crude for November shrugged off some early softness to steady $109.20 a barrel, though the weak greenback saw U.S. crude slip 32 cents to $103.78.
(Reporting by Marc Jones; Editing by John Stonestreet)