* Dollar slides as U.S. government pauses some services
* Equity, debt mostly firmer, anticipating early resolution
* Gold edges higher on limited safe haven demand
* Italian debt falls before key government vote
By Richard Hubbard
LONDON, Oct 1 The first American government
shutdown in 17 years weakened the dollar on Tuesday, sending it
to an eight-month low against the euro, but otherwise left
equity markets firmer while U.S. Treasury bonds fell.
Investors saw the shutdown as likely to be temporary, and
also as a factor that could further delay the U.S. Federal
Reserve's plans to start scaling back its monetary stimulus.
U.S. Federal government agencies have begun a partial
shutdown after lawmakers failed to pass a temporary spending
bill before a midnight deadline, threatening the salaries of up
to a million workers.
"We do not know how long this impasse in the U.S. will last.
If it persists, there is a chance it will hurt economic growth
and affect chances of Fed tapering," said Daragh Maher,
strategist at HSBC.
The dollar bore the brunt of the response, hitting a 1-1/2
year low against the safe-haven Swiss franc and a near
8-month low against a basket of widely-traded currencies.
The falls lifted the euro to an 8-month high of $1.3589.
"In the short term, it's better to avoid the dollar," Maher
However, U.S. stock index futures pointed to gains when Wall
Street opens later with the broad S&P stock contract
edging up 0.4 percent. The price of the 10-year U.S. Treasury
note, a bedrock reference for bond markets, has fallen, lifting
the yield 3 basis points to 2.645 percent.
Europe's broad FTSEurofirst 300 index, extending a
stellar performance in the September quarter, inched up 0.3
percent though was not far from a three-week low.
MSCI's world equity index, which tracks
shares in 45 countries, was up 0.2 percent by midday in Europe,
helped by gains in Asia after investors anticipating the news
had triggered its biggest daily fall of September on Monday.
"The U.S. shutdown is a central point for the markets, but
as long as the hope for just a temporary shutdown exists, it
will not be a strong burden for equities," Christian Stocker,
equity strategist at UniCredit said.
Gold, another traditional safe haven asset, popped higher
after the shutdown became apparent, hitting $1,331.50 an ounce,
though was well within its recent $1,300 to 1,350 range.
The bigger issue facing investors is the implications of the
political dysfunction in Washington for this month's
negotiations on raising the U.S. government's $16.7 trillion
borrowing limit, needed to avoid a default on its debt mountain.
"The real focus for markets is Oct. 17 when the debt ceiling
issue will come to the fore again," said Richard Lewis, head of
global equities at Fidelity Worldwide Investment.
"This is going to be much more important because a failure
to extend the debt ceiling would stop coupon payments on bonds,
creating a technical default that would cause a riot in bond
markets," he said in a note.
Markets were also absorbing mixed readings on economic
activity across the manufacturing sector for September and a
promise of a $50 billion stimulus package by Japan's government,
designed to offset the impact of a sales tax hike next April.
Japan's move came after a closely-watched central bank
survey showed sentiment among domestic manufacturer's had
improved sharply in the three months to September to reach a
near six-year high.
A separate euro zone factory activity survey revealed
growth, albeit at a slower pace than previously. In China,
factories expanded only slightly last month, raising questions
over the strength of its nascent recovery.
Italian bonds rose a day before Prime Minister Enrico Letta
was due to face a vote of confidence intended to resolve
tensions threatening the ruling coalition.
The yield on the benchmark 10-year Italian government bond
fell 2 basis points at 4.55 percent though traders
said talk of further liquidity support from the European Central
Bank could also be helping.
The ECB holds a policy meeting on Wednesday and is expected
to stick to its accommodative policy course..
Brent crude fell to near $108 a barrel, not far from a
7-week low, on worries that the U.S. government shutdown may
crimp oil demand. U.S. crude was at $102.29, down 5