* Dollar index at 8-month lows as euro extends gains
* ECB, Italian politics support common currency
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, Oct 3 The dollar rebounded against
the yen but struggled close to an eight-month low against a
basket of rivals on Thursday as the U.S. government shutdown
dragged on and positive developments in Italian politics helped
lift the euro.
President Barack Obama met with Republican and Democratic
leaders in Congress on Wednesday, but a solution seemed unlikely
as both sides dug in for what could be a long stalemate.
The 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.
The common currency added 0.2 percent to $1.3610
after rising as high as $1.3623, a level not seen since early
February, with its 2013 peak of $1.3711 set on Feb. 1 in sight.
The euro rallied after Italian Prime Minister Enrico Letta
won a confidence vote in parliament as Silvio Berlusconi
backtracked on threats to bring down the government.
Adding to the euro's momentum, the European Central Bank
reiterated it was ready to use any policy option to temper
market interest rates, but did not flag immediate action.
"Overall, we're still seeing a broad risk-on dynamic in the
FX market, while we try and wait and see what the developments
are in regard to the U.S. shutdown," said Sue Trinh, senior
currency strategist at RBC in Hong Kong.
"Risk-on tends to mean that U.S. dollar and yen are the
underperformers in that environment," she added.
The euro benefitted from the risk-on sentiment, particularly
in light of the European developments.
JPMorgan analysts said there was nothing in ECB President
Mario Draghi's comments that suggested the bank was poised to
aggressively ease and that declines in money market interest
rates since the last ECB meeting have in part lessened the
momentum for new measures.
Against the yen, the euro rose 0.6 percent to 132.92 yen
, while the dollar added 0.3 percent to 97.66 yen
, moving away from the previous session's five-week low of
The dollar's weakness against the euro helped push the
dollar index down about 0.1 percent to 79.848, though its
recovery against the yen kept it off a session low of 79.740
which was its lowest in eight months.
A notable mover was the New Zealand dollar, which initially
rallied after the Reserve Bank of New Zealand said larger
increases in interest rates would be needed if new limits on
mortgage lending fail to cool the country's housing market.
The kiwi last traded down 0.2 percent at $0.8300
after earlier spiking briefly to a high around $0.8340, pulling
well away from a two-week trough of $0.8194 plumbed on
Tighter monetary policy in New Zealand would further widen
the kiwi's yield advantage over its counterparts in countries
like the United States, where interest rates hover near zero.
The RBNZ comments also underpinned the Australian dollar
which rose slightly to $0.9387, pulling from an
overnight low of $0.9332, according to Reuters data.