FOREX-Dollar skids as U.S. budget fears sap demand
* Dollar slips as U.S. gov't shutdown concerns make traders wary
* Debt ceiling debate also weighs on dollar
* Solid German, Italian confidence data boosts euro
* Euro's gains seen limited due to ECB policy uncertainty
By Julie Haviv
NEW YORK, Sept 25 (Reuters) - The dollar fell on Wednesday after four straight sessions of gains, weighed down by worries about a potential U.S. government shutdown next week and the possibility of a federal debt default.
Congressional officials must reach a budget deal by Monday that would allow the government to keep running, but negotiations have been contentious so far.
The U.S. Senate began advancing a bill to keep the government operating beyond Sept. 30, when funding for this fiscal year runs out, as it cleared away a procedural hurdle that some Republicans had erected. The Senate unanimously agreed to limit early debate in the hope of passing a bill by this weekend.
Lawmakers must also raise the government's legal limit on borrowing in the coming weeks to avoid a default on the government's obligations, which could deliver a big blow to the economy. They must raise the nation's $16.7 trillion debt limit by mid-October, but U.S. politicians are deeply divided.
"The risk of a failure to extend America's borrowing ability could potentially result in a default on the nation's debt, a scenario that could do irreparable damage to international investor confidence in dollar assets," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The last debt ceiling showdown, in 2011, pushed the United States to within days of missing payments and led ratings agency Standard and Poor's to strip Washington of its triple-A credit rating.
In afternoon trading, the dollar was down 0.3 percent against a basket of currencies to 80.348.
A lack of clarity over how long the Federal Reserve - the U.S. central bank - will delay scaling back its massive economic stimulus has also weighed on the dollar.
The euro traded up 0.4 percent at $1.3524, not far from last week's high of $1.3569, hit after the Fed's surprise decision to keep its $85 billion monthly bond-buying stimulus intact. Traders reported strong chart support at $1.3450.
Against the yen, the euro climbed 0.2 percent to 133.28 yen .
Europe's common currency was helped by data showing consumer confidence in Germany at a six-year high and consumer morale in Italy at its strongest in over two years.
However, the euro's gains were expected to be limited by concerns about the possibility of monetary easing after European Central Bank President Mario Draghi this week spoke of the possibility of providing more cheap long-term loans.
The dollar was down 0.2 percent against the yen at 98.54 yen, although it rose against higher-yielding and riskier currencies as investors grew wary about a showdown in Washington.
The Australian dollar was down 0.3 percent at US$0.9364, while the New Zealand dollar, also pressured by a widening of the country's trade deficit, fell 0.4 percent to US$0.8248.
Orders for long-lasting U.S. manufactured goods barely grew in August in a possible sign that companies are holding back on investments due to uncertainty over government spending.
Other data on Wednesday showed sales of new U.S. homes last month were near their lowest level of the year, a sign that a rise in interest rates was weighing on the economy.
Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York, thinks the data does not point to an acceleration of economic activity at this stage.
"The report argues in favor of the FOMC's recent decision to await further data points that might indicate sustainability of demand," he said.