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Dollar near eight-month low, U.S. shutdown enters second week

By Dominic Lau

TOKYO (Reuters) - The dollar skidded to near an eight-month low on Tuesday as the U.S. government shutdown entered its second week, leaving investors on tenterhooks with politicians in Washington making little headway in agreeing on a deal to avoid a historic U.S. debt default.

The anxiety is expected to keep Asian stock markets under pressure, with Nikkei futures down 0.6 percent to indicate a softer opening for the Japanese benchmark. The Nikkei lost 1.2 percent on Monday to a one-month low.

There were signs of stepped up efforts in Washington on Monday to resolve the fiscal crisis, with President Barack Obama saying he would accept a short-term increase in the country's borrowing authority in order to avoid a crisis.

But seven days into a government shutdown and only 10 days from a critical need to raise the U.S. debt ceiling, nothing amounting to a breakthrough was in sight.

Trading remains relatively calm, suggesting many investors are confident that a deal to end the partial shutdown and raise the U.S. debt limit will emerge.

"Investors have been reluctant to embrace aggressive risk-off trades because they foresee a relief rally once a deal is made, i.e. when it's clear there won't be a default," analysts at Societe Generale wrote in a note.

"The risk however is that we get a toxic deal, one way or the other: the deal could simply raise the debt ceiling a bit, forcing further negotiations ... This would cause policy uncertainty and hurt the economy. Or the deal may include a further tightening of fiscal policy."

U.S. Standard & Poor's 500 e-mini futures dipped 0.1 percent in early Asian trade after the cash index ended down 0.9 percent on Monday and dropped for the 10th time in the past 13 sessions. U.S. Treasury futures added 1-1/2 ticks.

The dollar slipped 0.2 percent to 79.929 against a basket of major currencies, not far from an eight-month trough touched last week.

Against the yen, the greenback held steady at 96.66 yen after falling as much as 0.2 percent to 96.55 yen, hitting an eight-week low earlier in the Asian session.

It dropped 0.8 percent overnight to mark its biggest decline against the Japanese currency since September 18, when the Federal Reserve shocked investors by deciding to continue its stimulus programme.

"In the shorter-term, with financial sector stress increasingly looking like a necessary ingredient to forcing a negotiated solution in Washington, we think risks lie to the yen upside," analysts at BNP Paribas wrote in a note, though they remained optimistic that the U.S. fiscal crisis will be resolved.

Gold, seen as a safe-haven, inched up 0.1 percent to around $1,323 an ounce after gaining 0.8 percent on Monday, while the political wrangling in Washington kept pressure on oil prices for fear of the potential impact on economic growth.

U.S. crude oil steadied after shedding 0.8 percent in the previous session.

(Editing by Shri Navaratnam)