FOREX-Dollar drops as U.S. budget battle keeps investors wary
* Dollar slips as gov't shutdown fears make traders wary
* Debt ceiling debate also weighs down dollar
* Solid German, Italian confidence data boosts euro
* ECB policy uncertainty seen limiting euro strength
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 possible federal debt default and the chances of a U.S. government shutdown next week.
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 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 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.
"Obviously, each shut down and debt ceiling negotiation has had its own unique political backdrop and tone," said Alan Ruskin, head of foreign exchange strategy at Deutsche Bank in New York.
The dollar historically has tended to weaken in the 10 days before shut downs/debt ceiling resolutions and strengthen in the 10 days thereafter.
"The price action followed this pattern surrounding the last hotly contested debt ceiling resolution earlier this year," Ruskin said.
Once budget and debt issues are resolved, the dollar's performance is going to be particularly dependent on stronger data confirming that Federal Reserve tapering in 2013 is still possible, he added.
In late afternoon trading, the dollar was down 0.3 percent against a basket of currencies at 80.324.
Lack of clarity over how long the Fed will delay scaling back its massive economic stimulus should limit the dollar's upside.
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 rose 0.1 percent to 133.14 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 spoke this week of the possibility of providing more cheap long-term loans.
The dollar was down 0.3 percent against the yen at 98.48 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, a possible sign that companies are holding back on investments because of uncertainty about government spending.
Other data on Wednesday showed sales of new U.S. homes last month were near their lowest of the year, a sign 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.
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