* Dollar on defensive as US govt stays shut, debt ceiling
* Stocks, bonds see silver lining in cbank stimulus, Chinese
* Wall Street seen opening 0.2 pct lower
By Marc Jones
LONDON, Oct 3 The dollar hovered at an
eight-month low on Thursday as the U.S. government shutdown
dragged on, though stocks drew comfort from the view that major
central banks may now have to keep monetary policy super-loose
Also aiding sentiment was a hit of solid euro zone data and
an upbeat survey on China's huge services sector, which helped
balance disappointing manufacturing figures earlier in the week.
Markit's euro zone services Purchasing Managers Index, a
monthly survey of businesses, rose to 52.2 in September from
August's 50.7, while retail sales in the bloc posted their
second robust monthly rise on the trot.
That left the euro pushing a new eight-month high
against the dollar, which was sapped by the lack of progress in
U.S. budget talks.
U.S. jobless claims came in below economists' expectations,
but only briefly lifted the dollar against the yen.
And with no obvious opportunities for a breakthrough on the
government shutdown on Thursday, stock futures pointed to the
S&P 500 and Dow Jones industrials opening down
around 0.2 percent and facing the prospect of a ninth session in
11 in the red.
"The U.S. fiscal uncertainty is still the main thing that is
weighing on stocks," said Societe Generale strategist Alvin Tan,
adding that the dollar's weakness and the euro's rise were down
to a combination of factors.
"It was a bit of a follow-on from the ECB meeting yesterday
where Draghi - we think wrongly - was perceived by the market as
giving the green light to euro strength. And this morning we
have had some good data."
After Thursday's jobless claims data markets would normally
now be gearing up for the more important non-farm payrolls
figures later in the month, but with the government statistics
department part of the U.S. shutdown the data is likely to be
World stocks were holding up overall despite
all the U.S. uncertainty.
Asian shares ex-Japan ended 0.1 percent higher and European
stocks inched up ahead of the U.S. restart as London's FTSE
and the second day of outperformance by Italian shares
helped offset weakness in Paris and Madrid.
A meeting between U.S. President Barack Obama and
congressional leaders late on Wednesday produced only blame and
counter-blame, dimming hopes of an early end to the budget
So far, investors have been betting a budget deal would be
reached in time to avoid lasting damage to the economy, although
a potentially riskier fight over the U.S. debt ceiling looms.
Philip Marey, a senior U.S. economist at Rabobank, said
worries will only intensify the nearer Washington gets to the
Oct. 17 deadline when it will effectively run out of cash -
raising prospects of an unprecedented default which the market
for now assumes is unthinkable.
"I think at the most 100 basis points (drop in Treasury
yields) but more likely 70 or 80 basis points." For stock
markets like the benchmark S&P 500. "It could be something like
100 points," he added.
Already one effect has been to further cloud the outlook for
when the Fed will start scaling back bond purchases.
Eric Rosengren, head of the Federal Bank of Boston, said on
Wednesday that the government shutdown could further delay a
tapering because of a lack of official data on the economy.
That only amplified the startling swing in market thinking
about the future course of U.S. interest rates. Just a month
ago, the futures market had predicted the Fed funds rate
would be up around 1.465 percent by the end of 2015. Now it
implies a rate of just 0.745 percent.
That in turn has helped drag yields on the benchmark 10-year
U.S. Treasury note down, with them last at 2.6428
percent, from a September peak of 2.99 percent.
Bund yields, which move inversely to prices,
inched up in trading thinned by a German public holiday while
most other euro zone yields also edged higher as the upbeat euro
zone data left investors favouring shares.
In contrast to the increasingly dovish outlook for U.S.
rates, the European Central Bank (ECB) on Wednesday left
interest rates unchanged and gave no hint it was considering any
imminent policy easing despite insisting the option remains.
The dollar's diminishing yield advantage saw it slide to a
new eight-month trough against a basket of currencies going as
low as 79.740 before clawing back to last trade at
At the same time the euro climbed to an eight-month high at
$1.3625, bringing it in sight the 2013 peak of $1.3711
though it had settled back at $1.3600 as U.S. trading picked up.
"At face value, the commentary from the ECB sounded rather
dovish," said BNP Paribas economist Ken Wattret. "It was
apparently not dovish enough, however, with markets continuing
to view the ECB's position as one of 'all talk and no action'."
KIWI SHOOTS UP
The dollar did gain some traction on the yen, but only
because Japanese investors were selling their currency for
euros. Thus while the dollar steadied at 97.61 yen, the
euro rose more than half a yen to 132.88.
A notable southern hemisphere mover was the New Zealand
dollar, which rallied after the country's central bank said
larger increases in interest rates would be needed if new limits
on mortgage lending failed to cool the housing market.
The kiwi jumped to $0.8308, pulling well away from
a low of $0.8194 plumbed on Wednesday.
Trading was very choppy in commodity markets, though the
lower dollar tended to support prices.
Gold steadied at $1,310 ounce, having bounced
from a low of $1,278.24 on Wednesday while copper futures
wobbled after gains in Asia to stand at $7,255.50 a
Oil prices held their ground after a jump on Wednesday.
Brent crude for November shrugged off some early
softness to steady at $109.20 a barrel, though the weak dollar
saw U.S. crude slip 32 cents to $103.78.