| NEW YORK
NEW YORK The dollar fell against the euro on Thursday to its lowest in more than eight months as the end of the U.S. debt stalemate shifted focus to the impact of the government shutdown and the likelihood that Federal Reserve stimulus will stay in place.
The two-week shutdown and acrimonious debate over raising the U.S. debt ceiling have knocked investor and business confidence, denting growth prospects for the world's largest economy, analysts said.
That would likely keep the Fed from withdrawing monetary stimulus at least until the beginning of next year. U.S. Treasury yields slipped and dragged the dollar down against major currencies, including the yen.
"The dollar has traded very poorly on the back of the debt ceiling resolution," said Jens Nordvig, global head of currency strategy at Nomura in New York.
"It is hard to know if it is about a delay in growth and (Fed) tapering, or whether investors are starting to demand a political risk premium on the dollar. In any case, we are not inclined to trade the dollar from the bullish side at this point."
The euro rose as high as $1.3681, the highest since early February, and was last at $1.3678, up 1.1 percent on the day and its largest percentage gain in a month.
The dollar index .DXY was down 0.8 percent at 79.696 after earlier falling to 79.613, its lowest since February 7.
Against the yen, the dollar lost 0.8 percent to trade at 97.88 yen, pulling back from a three-week high of 99.00 yen set much earlier in the global day. The dollar trough on Thursday against the yen was the lowest in a week and it was the largest percentage fall in a month.
In the first wave of data released after the government returned to work, the Labor Department said the number of Americans filing new claims for unemployment benefits dropped from a six-month high last week. A separate report, meanwhile, showed business activity in the mid-Atlantic region expanded this month but more slowly than in September.
The dollar lost momentum after rising initially in anticipation of an end to the fiscal impasse, falling to lows versus the yen after the U.S. House of Representatives approved a deal already passed by the Senate.
The dollar's negative reaction to the end of the debt standoff and the re-opening of the government was probably due to the short-term nature of the debt deal, said Alan Ruskin, global head of FX strategy at Deutsche Bank in New York.
"The deal will leave ongoing fiscal uncertainties, posing a threat to a re-run of disruptive events," said Ruskin.
In addition, he said the upcoming release of September economic data will be regarded as pre-debt ceiling crisis and will not fully reflect the U.S. economy's growth momentum.
"This, in combination, with distorted October numbers, suggests that the Fed will not have reliable enough data to think about tapering for many months."
The Fed's Beige Book report on Wednesday suggested confidence had been dampened somewhat by budget battles in Washington. Gold jumped 3 percent on Thursday on the belief the Fed will delay tapering.
Adding to the dollar's woes was Chinese rating agency Dagong, which downgraded the United States to A- from A and maintained its negative outlook.
Though not followed widely outside China, moves from other ratings agencies will concern investors.
"While Dagong is often dismissed in the U.S., it should be given its due and its views should be respected," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange.
"When the rating agency attached to the largest foreign holder of U.S. Treasuries downgrades U.S. debt for the second time in three years, Chinese authorities take notice."
The dollar's broad losses saw growth-linked currencies, including the Australian and New Zealand dollars, surge to fresh multi-month highs.
The Australian dollar rose past reported option barriers to hit a four-month high and last traded at US$0.9634, up 1 percent. The New Zealand dollar soared to a five-month high, last changing hands at US$0.8502, up 0.8 percent on the day.
Of the 36 most actively traded currencies against the dollar month to date, just four are lower, another 31 are higher against the dollar and one unchanged.
(Additional reporting by Nick Olivari; Editing by Nick Zieminski)