* Dollar near eight-month low on ongoing U.S. government shutdown
* Dollar bounces from 1-1/2-year low versus Swiss franc
* Prolonged U.S. government closure could postpone Fed tapering
* Euro falls from eight-month high, minor setbacks seen
By Julie Haviv
NEW YORK, Oct 4 (Reuters) - The dollar rose against a basket of major currencies on Friday after five straight sessions of losses but remained within striking distance of an eight-month low hit the previous day, as the U.S. government closure continued.
The shutdown of the U.S. government appeared likely to drag on for another week and possibly longer as lawmakers consumed day three of the shutdown on Thursday with a stalling game, and with no end in sight until the next crisis hits Washington around Oct. 17.
Oct. 17 is the date Congress must raise the nation’s borrowing authority or risk default, and members of Congress now expect it to be the flashpoint for a larger clash over the U.S. budget as well as President Barack Obama’s healthcare law.
The U.S. dollar index, which tracks the greenback against six major currencies, last traded up 0.3 percent at 79.994, but not far from Thursday’s eight-month low of 79.627. The euro, which traded weaker, dominates the composition of the index.
The greenback’s gains were pronounced against the Swiss franc, rebounding from a 1-1/2 year low reached the previous day. The Swissie was weighed by news that Switzerland’s financial markets regulator is investigating several Swiss banks in connection with the possible manipulation of foreign exchange rates.
“So far markets have mostly treated (the government shutdown) as a U.S.-centric growth shock from fiscal/confidence effects, rather than as a tail-risk shock to market risk,” said Dan Dorrow, foreign exchange strategist at Faros Trading.
“The present state of things is emerging market risk-positive as it keeps hyper-accommodative Federal Reserve stimulating flows into emerging markets,” he said.
The euro fell 0.3 percent to $1.3584, but not far from a peak of $1.3645 reached on Thursday, which marked its highest since February. It has risen nearly 0.5 percent on the dollar so far this week.
Analysts predicted minor setbacks and some consolidation for the euro going into the weekend after its recent ascent. Real money accounts were cited as main sellers of the pair taking it below the $1.3600 mark.
“No one wants to touch the dollar while we have uncertainties regarding the U.S. government shutdown. We also had a disappointing service sector number and that also added to the negative dollar sentiment,” said Niels Christensen, FX strategist at Nordea.
The government shutdown has led the U.S. Labor Department to delay the employment report for September, which was scheduled for Friday. No new date was set for the release of the data.
Thus, any confirmation of an improving labour market that the Federal Reserve wants to see before cutting its stimulus will likely be delayed, hurting the dollar. Two senior Fed officials said monetary policy was being kept easier to help offset the harm caused by political fighting.
“Those who have been expecting (Fed tapering) in October should be having a bit of panic now. Those who have bet on December may be worried too,” said Katsunori Kitakura, associate manager of market making at Sumitomo Mitsui Trust Bank.
Meanwhile, the resolution of Italy’s latest political crisis, the European Central Bank refraining from any immediate policy action to help the economy, and this week’s data all supported the euro this week.
But Sara Yates, global currency strategist at JPMorgan Private Bank said the prospect of the Fed eventually trimming its bond purchase program could push benchmark U.S. 10-year Treasury yields to 3.0 percent or higher next year and support the dollar.
At the same time “sentiment towards Europe will likely improve but the ECB will stand ready to ease policy to stop financial conditions from tightening too much,” she said, adding in such a case the euro could target the $1.28 mark.
The dollar was down 0.1 percent against the yen at 97.14 yen after the Bank of Japan kept rates on hold as was widely expected.