* Dollar selloff abates though index still near 7-month low
* German election outcome this weekend a key euro focus
* Dollar climbs to one week high vs yen
NEW YORK, Sept 20 (Reuters) - The dollar edged up further from a seven-month low against a currency basket on Friday though investors remained cautious given ongoing uncertainty over the U.S. Federal Reserve’s stimulus and looming congressional budget battles.
The dollar touched a one-week high against the yen and rose against the euro after St. Louis Fed President James Bullard said it was possible the Fed might start to scale back bond purchases at its October meeting, depending on U.S. economic data..
But many investors are cautious about Fed officials’ speeches given the market’s shock when the Fed did not begin to slow its stimulus at this week’s meeting, something many had bet on.
Although the dollar saw broad gains, analysts said it was likely to remain weighed-down near term by the lack of clarity from the Fed after the U.S. central bank unexpectedly maintained bond purchases at $85 billion a month on Wednesday.
Added to that uncertainty is a looming battle between rival U.S. political parties over raising the U.S. debt ceiling to allow the government to keep borrowing money to pay its bills. That decision is expected to come to a head later this year.
Even closer is a congressional battle over the Federal budget to avoid shutting down the government.
“As Congress returns to work in Washington DC, the two parties show no willingness to compromise on the key issues of budget deficit and debt ceiling limits,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
“With (the Republicans) sensing that President Obama has been weakened by his handling of the Syria crisis, their intransigence may only harden as the days go by, with the possibility that the U.S. could face another government shutdown.”
The dollar index was last up 0.1 percent at 80.454, a little above Wednesday’s seven-month trough of 80.060.
The euro was down 0.1 percent at $1.3519, having hit a 7-1/2 month high on Thursday.
The U.S. House of Representatives on Friday passed legislation to fund federal agencies from Oct. 1 to Dec. 15 while also derailing the healthcare law known as “Obamacare.”
In a partisan vote of 230-189, the Republican-controlled House sent the measure to the Senate where Democrats hold a majority and will try to delete the Obamacare provision and send the spending bill back to the House for passage by Sept. 30 in order to prevent government shutdowns the following day.
Some analysts, however, felt the dollar’s longer-term uptrend was still intact.
“The main takeaway from Wednesday is that Fed tapering is delayed, not that it has been removed. At some point the Fed will move to taper and we will see U.S. yields move a bit higher and support the dollar,” said Sara Yates, global currency strategist at JP Morgan Private Bank in London
Barclays Capital strategists expect the Fed to start tapering in December 2013 and raise rates in June 2015.
Analysts said the euro could see a marginal impact from Germany’s general election on Sunday.
Chancellor Angela Merkel is seeking a third term but there are doubts she will be able to maintain her centre-right coalition, which could complicate her euro zone policy.
The euro was little changed at 134.48 yen, not far from the near four-year high of 134.94 yen touched on Thursday.
The dollar was almost steady at 99.48 yen after climbing as high as 99.67 yen. Options traders cited renewed demand for dollar upside strikes. One-month risk reversals showed a slight bias toward dollar calls or bets the greenback will gain versus the yen, against a bias in favour of dollar puts just before the Fed meeting.
The yen sold off broadly on Thursday as risky assets rallied after the Fed’s decision. Investors tend to sell the yen in favor of higher-yielding assets when risk appetite is strong.
The Japanese currency stayed close to lows hit on Thursday, including a three-month low versus the Australian dollar, its weakest in nearly four years against the euro and a 23-year trough versus the Swiss franc.