FOREX-Dollar drifts up from 2-mth low vs yen, U.S. impasse in focus

Tue Oct 8, 2013 12:12am EDT

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* Euro underpinned by hopeful signs that Greece could emerge from recession

By Lisa Twaronite

TOKYO, Oct 8 (Reuters) - The dollar eased off a fresh two-month low against the yen touched in early trade on Tuesday and remained not far from an eight-month low against a basket of major currencies, as a continuing U.S. fiscal standoff kept investors on their toes.

A few hopeful signs emerged on Monday, with President Barack Obama saying he would accept a short-term increase in the nation's borrowing authority to avoid a default. An influential Senator is also said to be floating a plan to cut federal spending and reform the U.S. tax code as part of a broader deal.

The dollar fell to 96.55 yen, its lowest since Aug. 12, before recovering to 96.92 yen, up about 0.2 percent on the day, and pushing back above its 200-day moving average at 96.72 after breaching that technical support level.

"It's a bit frustrating, because people want to trade on those technicals, but it's really being driven by external factors and if that (U.S. situation) were to rectify itself, we'd probably be right back where we were at 98.50, 99," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.

Obama's press secretary, Jay Carney, told reporters the president would be willing to accept a short-term increase in the debt ceiling in order to get past the potential crisis date of Oct. 17. The government hits its $16.7 trillion borrowing limit then, and in a worst-case scenario, it could default on its obligations.

"There's really not a lot of panic going on with the U.S. situation. I think everyone's expecting they'll figure it out, do the right thing," Wakabayashi said, adding that "the market is not positioned for a worst-case scenario."

China and Japan, the United States' biggest creditors, are increasingly worried the U.S. government shutdown and standoff over the debt ceiling could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.

Japanese Finance Minister Taro Aso said on Tuesday that he wants the United States to resolve its debt ceiling standoff quickly to preserve his country's foreign reserves and the global economy.

The impasse has distracted investors from what had previously been their main preoccupation: the timing of the U.S. Federal Reserve's reduction of its stimulus, which had buoyed the greenback in recent months.

"No one wants to be caught short if there's a sudden resolution of the fiscal impasse, so every time the dollar takes two steps down, it tends to take one step back up," said a researcher at a foreign exchange market research firm in Tokyo.

The dollar index inched up 0.1 percent to 80.024 creeping away from its eight-month low of 79.627 hit on Thursday last week.

The euro drifted lower, down about 0.2 percent at $1.3561 , pulling away from an eight-month high of $1.3645 touched on Thursday.

The European currency was underpinned by news from Greece that the struggling nation will emerge from six years of recession next year, according to a draft budget forecast on Monday.

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