* World shares drop for 3rd day on U.S. deadlock
* Dollar makes gains on yen and Swiss franc on Fed minutes
* Oil dips below $110, gold eases
By Barani Krishnan
NEW YORK, Oct 9 Strains in short-term interest
rates and funding markets increased on Wednesday as the battle
over the U.S. debt ceiling heats up, but the dollar rallied
after the Federal Reserve said the decision not to reduce bond
purchases in September was a close call for some policymakers.
On Wall Street, stocks edged higher, recovering some of the
day's earlier declines, while high-performing technology stocks
added to recent losses amid an ongoing Washington standoff and a
looming deadline to raise the U.S. debt ceiling.
Short-dated U.S. Treasury bill yields were higher on
increased concern whether the government will raise the federal
borrowing limit by an anticipated Oct. 17 deadline.
Short-term repurchase markets - the plumbing of daily
banking operations - saw overnight interest rates to their
highest in five months on similar fears.
The Federal Reserve's minutes from its September meeting
showed that most members of the committee thought they needed
more evidence of sustainable economic progress, though the Fed
said it was a "relatively close call" for several voters.
"It's interesting that there would be such a heated debate,
since it is painfully clear that the economy is still in such a
fragile state that the Fed can't start the tapering process,"
said Todd Schoenberger, managing partner at LandColt Capital in
"Some were looking for improvements in data, but clearly the
economy can't stand on its own without intervention. Between
slow growth and the shutdown, it's clear we're in troubled
times. I wouldn't expect any tapering for quarters from now."
On the release, the U.S. dollar rallied, with the dollar
index rising to 80.52, up 0.6 percent, and the euro falling to
$1.3489, down 0.6 percent on the day.
At 2:10 ET (1710 GMT), the Dow Jones industrial average
was up 66.21 points, or 0.45 percent, at 14,842.74. The
Standard & Poor's 500 Index was up 5.65 points, or 0.34
percent, at 1,661.10. The Nasdaq Composite Index was
down 6.93 points, or 0.19 percent, at 3,687.90.
The Treasury sold $21 billion in 10-year notes on Wednesday,
the second sale of $64 billion in new coupon-bearing supply this
week. It will also sell $13 billion in 30-year bonds on
The benchmark 10-year U.S. Treasury note was down 7/32, its
yield at 2.6631 percent.
The expected nomination of Janet Yellen to head the Federal
Reserve had a modest effect on markets, meanwhile, given the
political wrangling in Washington that could lead a U.S. debt
default within the next few weeks.
The 67-year-old Yellen is seen largely sticking to Ben
Bernanke's policies aimed at boosting economic activity.
"The markets are finding consolation in Yellen's expected
nomination because that at least puts the monetary policy on a
more certain, or at least, a more familiar path," said Anastasia
Amoroso, global market strategist at J.P. Morgan Funds in New
European shares hit a one-month low. The MSCI's
world index was down 0.2 percent, its lowest
level since Sept. 9.
DOLLAR UP, COMMODITIES DOWN
The dollar rose from an eight-month low against major
currencies, riding on the sentiment from Yellen's impending
nomination and hopes that U.S. lawmakers will eventually reach
an agreement on the budget.
Congress must come up with a deal by Oct. 17, when Treasury
Secretary Jack Lew has said the government will run out of money
to pay its bills.
The euro fell 0.4 percent to $1.3515. Against the
yen, the dollar rose 0.5 percent to 97.33 yen, moving
away from a two-month low of 96.55 touched on Tuesday.
Jane Foley, senior currency strategist at Rabobank, said
markets were wary that an eleventh-hour deal could drive dollar
higher and thus, no one wanted to be too short the currency.
"There are expectations that as soon as there is a deal in
Washington there will be a relief rally in the dollar, so people
don't want to be too short of the dollar," Foley said.
In commodities, oil prices eased below $110 a barrel
on concerns that the budget deadlock would weigh on
investor confidence, hurting demand for crude. The spot price of
gold was down 1.5 percent at $1,306 an ounce, after
hitting a 1-week bottom at below $1,300.