* U.S. budget deadlock continues, but some movement seen
* Dollar edges off near 8-month low vs major currencies
* World shares and oil stick within narrow ranges
* Wall Street set for mixed open
By Richard Hubbard
LONDON, Oct 8 Faint signs of movement on the
fiscal standoff in Washington helped lift the dollar off an
eight-month low on Tuesday, but fears it could result in a U.S.
debt default weighed on world shares and oil.
A White House spokesman said on Monday it would accept a
short-term increase in the nation's borrowing authority to avoid
a default. An influential senator was also said to be floating a
plan to cut federal spending and reform the U.S. tax code as
part of a broader deal.
As the partial U.S. government shutdown enters a second
week, most investors still believe Republicans and Democrats can
reach deals on the budget and the debt ceiling.
But worries they may fail were beginning to grow.
"In our opinion markets are a little too complacent. The
downside risks are horrendous if there is no resolution and the
debt ceiling is breached," said Kevin Corrigan, head of credit
at Lombard Odier Investment Managers.
Banks and investors outside the U.S. were also moving on
Tuesday to ensure a steady supply of dollars to cover the
critical mid-October period when the government hits the
borrowing limit, paying sharply higher premiums in the forward
foreign exchange market.
All the uncertainty kept the MSCI world equity index
, which tracks shares in 45 countries, within a
narrow range with U.S. stock index futures pointing to a mixed
start when trading on Wall Street opens later.
The stability of riskier assets in the face of the potential
threat of a U.S. debt default, which would spark massive turmoil
on global financial markets, though has encouraged some
investors to expect a big relief rally if a deal gets done.
"I'm prepared to step out at any time should it come
crashing down, but for the moment I'm still betting on the
upside," said Andreas Clenow, hedge fund trader and principal of
Zurich-based ACIES Asset Management.
"Equities have held up remarkably well given what's going
on. If that's not a strong sign, I don't know what is."
Brent crude oil, another asset seen as a riskier investment,
edged above its recent range of $109-$110 to $110.35 a barrel
, although analysts said it could be gaining from the
withdrawal of financial investors who wanted to sell.
"Oil is still doing surprisingly well, given the ongoing
budget crisis in the U.S., the approach of the debt ceiling and
mounting supplies," said a Commerzbank research note.
"Nevertheless, we suspect that the latest show of strength
on the part of oil is only temporary."
European equities traded lower after ending in negative
territory for three of the last four trading sessions. The broad
FTSE Eurofirst 300 index dipped 0.5 percent by midday.
Earlier MSCI's broadest index of Asia-Pacific shares outside
Japan reversed losses to gain 0.4 percent,
helped by a sharp rise in Chinese stocks on their
first trading day in a week after the National Day holidays.
The dollar saw the main benefit from the signs lawmakers
were taking steps to try to end the deadlock, gaining 0.5
percent against the perceived safety of the yen to hit 97.20 yen
. Though this only took place after the greenback had
dropped to 96.55 yen, its lowest since Aug. 12.
The dollar index, which measures the U.S. currency's value
against a basket of currencies,, was still within
striking distance of last week's eight-month low of 79.627 and
traders said it remained vulnerable to further selling.
The longer the political deadlock runs, the greater the
expected economic damage and the more likely it becomes that the
Federal Reserve will continue for longer a stimulus programme
that has flooded global markets with dollars.
America's biggest creditors, China and Japan, have also said
they are increasingly worried that the developments in
Washington could wreak havoc on their trillions of dollars of
investments in U.S. Treasury bonds.
"The risk is to the downside for the dollar as long as we
don't have an agreement," said Niels Christensen, currency
strategist at Nordea.
The U.S. anxiety - and a broadly softer dollar - has helped
support gold, which extended gains into a second day on Tuesday
to trade up 0.2 percent at $1,318 an ounce.
Gold also gained support from Chinese buyers returning after
a week-long holidays. China is the world's second-biggest gold
consumer after India.
The worries over the U.S. fiscal impasse largely
overshadowed data from China showing business confidence in the
countries services sector had slipped in September though the
economy remained on course for expansion.
Copper, which is very sensitive to Chinese data due to the
country's heavy demand for the metal, was slightly firmer, up
0.2 percent at $7,260 a tonne, though within the $7,000-$7,500 a
tonne range seen since early August.