* Dollar index at 8-month lows as euro extends gains
* Dollar extends losses after weak service sector data
* U.S. jobless claims reflect healing labor market
* ECB and improved data support common currency
By Julie Haviv
NEW YORK, Oct 3 The U.S. dollar fell for a fifth
straight session against a
basket of major currencies on Thursday, hitting an eight-month
low, as investors fretted about a partial U.S. government
shutdown that dragged on for a third day.
While a short-term government closure is expected to have a
limited effect on the U.S. economy, the impact will be greater
should the impasse continue. A prolonged shutdown could prompt
the Federal Reserve to postpone withdrawing monetary stimulus,
which will weigh on the dollar in the near term.
President Barack Obama met with Republican and Democratic
leaders in Congress late Wednesday to try to break the budget
deadlock that has shut down wide swaths of the government, but
there was no breakthrough and both sides blamed each other.
Obama's healthcare law was at the center of the impasse.
The dollar index, which tracks the greenback against six
currencies, hit a trough of 79.740, its lowest since
February. It last traded at 79.874, flat on the day. The euro
dominates the composition of the index.
The dollar extended losses versus the euro and pared gains
versus the yen after U.S. data showed growth in the services
sector cooled last month as the pace of new orders dipped and
The euro hit an eight-month high against the dollar,
supported by the weak U.S. data, apparent lack of concern by the
European Central Bank about the currency's recent strength and
"The euro has become the new safe haven in this
environment," said Steven Englander, head of G10 strategy at
CitiFX, a division of Citigroup, in New York.
"The situation in Washington has left the dollar vulnerable
across the board and its underperformance against other majors
like the euro is here to stay for the time being," he said.
The U.S. government standoff comes a few weeks ahead of the
next political battle to raise the federal government's
borrowing limit. Failure to do this could result in a worst-case
scenario of an historic U.S. debt default.
With the government shutdown expected to continue through
Friday, the U.S. Labor Department's September nonfarm payrolls
report, a key monthly driver of financial markets and a factor
in Federal Reserve policy, will be delayed.
The dollar, nevertheless, barely reacted to data pointing to
a healing labor market. The number of Americans filing new
claims for jobless benefits edged higher last week but remained
at pre-recession levels.
In early New York trade, the euro was up 0.1 percent at
$1.3594, not far from the session's peak of trading at
$1.3623, its highest level since Feb. 4.
Higher-than-expected retail sales, a recovery in the euro
zone services sector, along with a jump in Italy's services
sector all underpinned the single currency.
Improved political stability after the Italian government
won a confidence vote on Wednesday also helped.
On a trade-weighted basis, the euro was
trading near highs seen in February before ECB President Mario
Draghi flagged concerns about a strong euro and its impact on
growth and inflation.
Those comments led to a decline in the exchange rate in
With the euro now back up to February levels, there were
expectations that Draghi may talk it down by showing a readiness
to offer more long-term loans to banks to keep money market
rates from rising. Looser money market conditions and low rates
make it less attractive to hold a currency.
However, at his press conference after the monthly
rate-setting meeting on Wednesday, Draghi appeared to show
little concern, sending the euro to an eight-month high above
"President Draghi's appearance is characterised by what he
did not say, with little to contain the euro appreciation
trend," said Tom Levinson, currency strategist at ING.
"Euro/dollar is primed for a test of its Feb. 1 high at
$1.3711, levels the ECB back then was not prepared to accept."
Indeed, one-month euro/dollar risk reversals,
which measure the relative demand for options on a currency
rising or falling, shows a lesser bias for euro weakness.
Against the yen, the euro was up 0.4 percent to 132.70 yen
, while the dollar added 0.3 percent to 97.64 yen
, moving away from the previous day's five-week low of
97.12 yen, according to Reuters data.