* Dollar on defensive as US government stays shut, debt ceiling looms
* Obama meets congressional leaders, progress to be tough
* Stocks slip, bonds gain amid risk aversion
By Wayne Cole
SYDNEY, Oct 3 (Reuters) - The U.S. dollar stayed under pressure in Asia on Thursday in what looked likely to be another jittery session for stock markets as President Barack Obama met congressional leaders to try and break a deadlock on the U.S. government shutdown.
So far investors have been wagering that some deal would be reached in time to avoid lasting damage to the economy, although another fight over the debt ceiling still looms.
The ceiling is far more important than the shutdown, as it could lead to an unprecedented default by the United States, an outcome the market assumes is unthinkable.
Both U.S. and European shares ended Wednesday with only modest losses, while the euro got a lift as the Italian government survived a no-confidence vote and the head of the European Central Bank made no effort to talk down the currency.
The Dow Jones industrial average eased 0.39 percent, while the S&P 500 was just a fraction lower. MSCI’s world equity index dipped 0.13 percent.
The dollar took another hit when the head of the Federal Reserve Bank of Boston, Eric Rosengren, said the government shutdown could further delay a tapering of its asset-buying program because of a lack of official data on the economy.
That only added to the swing in market expectations on the future course of U.S. interest rates, which has been dramatic.
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 to 2.62 percent, from a September peak of 2.99 percent.
The dollar’s diminishing yield advantage has seen it peel off to a five-week low on the yen at 97.27. The euro hopped up three quarters of a cent to $1.3580, while the dollar index touched its lowest since February.
In contrast to the increasingly dovish outlook for U.S. rates, the ECB on Wednesday left interest rates unchanged and gave no hint it was considering further easing.
Also aiding sentiment on European assets was a victory for Italian Prime Minister Enrico Letta’s government in a no confidence vote, which ended fears that the euro zone’s third-largest economy would be forced into new elections.
Italian shares and bonds both rose as it become clear that former Prime Minister Silvio Berlusconi would drop his attempts to bring down the government, sending Milan’s FTSE MIB share index up as much as 1.8 percent, before closing 0.7 percent higher.
In commodity markets, the lower dollar tended to support prices in choppy trading. Gold rebounded to $1,315.41 an ounce , so recouping most of Tuesday’s sharp fall. Copper futures added just over 1 percent.
Brent crude for November rose $1.14 to $109.08 a barrel. U.S. crude was off 28 cents early on Thursday at $103.83 a barrel, but that followed a jump of more than $2 on Wednesday.