NEW YORK Major stock markets rose on Friday but posted a second week of losses while the dollar hovered near an eight-month low on fears the budget standoff in Washington will drag on until politicians reach a deal to raise the U.S. debt ceiling.
U.S. stocks ended higher on the day, but the Dow and S&P 500 indexes fell for the week as the partial U.S. government shutdown entered its fourth day and appeared likely to drag on for another week or more.
While selling has been orderly so far, investors see volatility rising if the shutdown continues, which would hurt the economy. Many do not expect lawmakers to reach an agreement until they near the deadline to raise the U.S. government's $16.7 trillion debt ceiling to avoid a U.S. default. Treasury Secretary Jack Lew has said the government will hit the limit by October 17.
Fears of a U.S. default lifted interest rates on ultra-short-term U.S. Treasury bills to their highest levels in over 10 months, while the cost of insuring one-year U.S. government bonds against default hit the highest level since August 2011.
"If there's no agreement by the end of next week, the concern will really become greater and the impact will be more pronounced," said Kate Warne, investment strategist at Edward Jones in St. Louis. Warne helps oversee $670 billion in assets.
MSCI's world equity index .MIWD00000PUS, which tracks shares in 45 countries, edged up 0.2 percent on the day, but lost 0.4 percent this week.
House Republicans held their ground Friday in a standoff with President Barack Obama over the shutdown, triggered by a dispute over the president's healthcare reforms. The two sides also dug in over a measure to raise the nation's borrowing authority, which is considered more important by investors.
Top international policymakers have warned that a failure to raise the U.S. debt ceiling would be a serious blow to the world economy. On Thursday, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said the shutdown will hurt growth in the last quarter of this year, while the Bank of Japan said an extended U.S. budget standoff would have a severe global impact.
Still, many long-term investors believe Congress will eventually resolve the budget and debt issues, which would ensure that any stock pullback would be followed by a rebound.
"Day by day, people are getting more tense," said Francois Savary, chief investment officer at Swiss firm Reyl. "But we are betting on the fact that a deal will be found, and this should provide us with the opportunity to increase our equity exposure."
European shares .FTEU3 rose 0.1 percent to end at 1,243.74 points.
SHORT TERM BILL RATES RISE
The U.S. shutdown delayed the government's release of non-farm payrolls data for September, which had been scheduled for Friday. The Labor Department's monthly jobs report has been playing a key role in the Federal Reserve's assessment of the economy in its deliberations on when to scale back stimulus. The postponement had no noticeable market impact.
The dollar .DXY rose for the first time in six days. It gained 0.5 percent to 80.138 against a basket of major currencies. The euro slipped 0.5 percent to $1.3552. The dollar had hit an eight-month low on Thursday on views the government shutdown will further delay the Fed's plans to reduce its bond-buying program.
On October 17, when the government is projected to reach its debt ceiling, $85 billion of Treasury bills will mature. The interest rate on that T-bill issue last traded at 0.12 percent, up 1 basis point from late on Thursday and up 8 basis points on the week.
Interest rates on T-bills that mature in the first half of November last traded at 0.1 percent, 4 basis points higher than late Thursday and up 8 basis points from a week earlier.
"We are seeing some real volatility in the bill sector," said Jason Rogan, managing director of Treasuries trading at Guggenheim Partners in New York. "Bills are showing the first signs of distress."
The benchmark 10-year U.S. Treasury note was down 10/32, its yield at 2.651 percent.
Oil prices rose as a tropical storm approached the oil-producing regions around the Gulf of Mexico, offsetting worries that a prolonged U.S. government shutdown will dent demand.
Brent crude rose 46 cents to settle at $109.46. U.S. oil gained 53 cents to settle at $103.84.
Gold slipped to $1,309 an ounce from $1,316.69.