FOREX-Euro eyes 2013 peak, dollar hamstrung by Washington impasse

Thu Oct 3, 2013 7:24pm EDT

* Euro holds firm, not far from this year's peak of $1.3711

* U.S. budget woes keeping dollar pinned down

* BOJ policy meeting outcome in focus, no fresh stimulus expected

By Ian Chua

SYDNEY, Oct 4 (Reuters) - The euro started trade in Asia on Friday within striking distance of its 2013 peak, having pushed higher for a second session thanks to a flow of encouraging euro zone data at a time when a U.S. government shutdown is keeping the dollar pinned at 8-month lows.

The common currency last traded at $1.3630 after stretching as far as $1.3646, a level not seen since early February when it scaled this year's peak of $1.3711. It has risen 0.8 percent on the dollar so far this week.

A number of factors supported the euro not least a survey showing Italy's services sector unexpectedly grew in September for the first time in more than two years.

In contrast, growth in the massive U.S. service sector cooled last month, making for an uncomfortable read just as the shutdown in Washington is fuelling concerns of wider economic consequences.

Fears are also growing that the current impasse would merge with a much more complex fight looming later this month over raising the federal debt limit. Failure to do so may lead to a historic debt default.

This also means the Federal Reserve will be in no hurry to scale back its massive stimulus, a signal for dollar bulls to hold back.

The dollar index, which tracks the greenback's performance against a currency basket, wallowed at an eight-month low, having shed 0.7 percent so far this week.

Two senior Fed officials warned of damaging consequences if the nation defaults on its debt and said monetary policy was being kept easier to help offset the harm caused by political fighting.

"The dollar will be hobbled as long as the U.S. budget/debt uncertainties reign, but we are optimistic a resolution will be found before the 17 October deadline," analysts at Societe Generale wrote in a client note.

As a result, they recommend investors sell the euro into strength against the dollar. They also suspect the European Central Bank will eventually be forced into action by euro area disinflation and falling excess liquidity, an outcome that will weigh on the euro.

Against the yen, the dollar stood at 97.20, having slid to a five-week low of 96.93. The euro fared better, rising to a high of 133.21 yen before retracing to 132.52. It was well off this week's trough around 131.39.

The yen's fortunes hinge on the outcome of the Bank of Japan meeting expected around 0230-0500 GMT, followed by a brief media conference from BOJ Governor Haruhiko Kuroda at 0630 GMT.

But no one is expecting any fireworks with the BOJ seen maintaining its stimulus and reiterating its view that the economy is strong enough to weather next year's sales tax increase without additional policy measures.

With the U.S. standoff keeping risk appetite at bay, commodity currencies struggled to capitalise on the soft dollar. The Australian dollar was firm at $0.9405, but still in this week's $0.9280-$0.9435 range.

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