* Dollar index pares losses but still not far off 8-month
* No resolution yet to U.S. budget talks, debt ceiling risk
* Minutes of Fed's Sept policy meeting next in focus
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, Oct 9 The dollar got some relief
against the yen on Wednesday from news U.S. President Barack
Obama has tapped dovish Federal Reserve Vice Chairwoman Janet
Yellen to head the U.S. central bank, though the U.S. budget
impasse kept the greenback near an eight-month trough against a
basket of currencies.
Obama will announce his selection of Yellen later on
Wednesday. If confirmed by the U.S. Senate, Yellen would replace
Ben Bernanke, whose second four-year term as head of the Fed
expires on Jan. 31.
Against the safe-haven yen, the dollar rose about 0.4
percent on the day to 97.22 yen, moving away from a
two-month low of 96.55 touched on Tuesday and from a Wednesday
session-low of 96.83 yen. The euro was steady at $1.3574.
The dollar index pared early losses, thanks to
the weaker yen, and was trading nearly flat at 80.011, though it
did not stray far from a 79.627 trough hit last Thursday, a low
not seen since early February.
Investors' demand for risk assets rose "on the perception
that Yellen is a perma-dove. She's certainly outspoken as an
advocate for easy policy," said Sue Trinh, senior currency
strategist at RBC in Hong Kong.
"I wouldn't expect this rally in risk to be too sustainable
given much bigger issues at play including the U.S. government
shutdown. The Oct. 17 initial deadline looms large as well," she
Hopes are fading that a resolution can be reached before the
mid-October deadline when Congress must decide whether to raise
the government's borrowing limit or face the risk of an historic
The uncertainty is likely to leave investors reluctant to
take on big positions, and keep major currencies in tight
"It seems increasingly likely that the impasse in Washington
is going to persist up to or even beyond the October 17 soft
deadline for raising the debt ceiling, implying near-term risks
to the downside for the USD," analysts at BNP Paribas wrote in a
"We think USD/JPY is particularly vulnerable in light of
stretched short yen positioning and the yen's structural
tendency to perform well in periods of elevated risk aversion
and market stress," they said.
While there is no sense of panic in financial markets yet,
signs of unease are starting to emerge, such as investors'
waning appetite for U.S. Treasury bills.
Normally an uneventful offering, Tuesday's sale of one-month
bills met such weak demand that investors sought the highest
yields in five years, against a backdrop of concern about the
possibility of default.
Traders expect the dollar would underperform safe-haven
currencies like the yen and Swiss franc if a worst-case scenario
cannot be averted and the U.S. defaults on its obligations, but
emerging market currencies would be hit even harder.
A senior U.S. Treasury official called on Congress to
re-open the government and raise the debt ceiling or risk
hurting the United States' international reputation as a safe
haven and stable financial centre.
The chief economist of the International Monetary Fund also
warned that failure to lift the debt ceiling would lead to
dramatic cuts in government spending and "probably ... a lot of
So far, though, there was no sign of a breakthrough in
Washington. President Barack Obama said he would be willing to
negotiate on budget issues only after House Republicans agree to
re-open the federal government and raise the debt limit with no
House Republicans said they would insist on
deficit-reduction talks with Obama as a condition for raising
the federal debt limit.
Investors will also be keeping an eye on minutes of the
Federal Reserve's September meeting, when the central bank
caught markets off guard by maintaining its bond-buying stimulus
The current budget impasse and growing danger of the U.S.
economy slipping back into recession appeared to validate the
Fed's decision to remain cautious.
But dollar bulls maintain hope that once the budget impasse
and default danger passes and the economic recovery is back on
track, the U.S. central bank will begin to taper its asset