Tue, 8 Oct 01:05:00 GMT
By Dominic Lau
TOKYO, Oct 8 (Reuters) - The dollar skidded to near an eight-month low on Tuesday as the U.S. government shutdown entered its second week, leaving investors on tenterhooks as politicians in Washington made little headway in agreeing a deal to avoid an historic U.S. debt default.
This anxiety kept Asian shares on the back foot, with Japan's Nikkei <.N225> down 0.4 percent to a five-week low after shedding 1.2 percent on Monday and MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> off 0.1 percent.
There were signs of stepped-up efforts in Washington on Monday to resolve the fiscal crisis, with President Barack Obama saying he would accept a short-term increase in the country's borrowing authority in order to avoid a crisis.
But seven days into a government shutdown and only 10 days from a critical deadline to raise the U.S. debt ceiling, nothing amounting to a breakthrough was in sight. [ID:nL1N0HX0M5]
Trading remains relatively calm, suggesting many investors are confident that a deal to end the partial shutdown and raise the U.S. debt limit will emerge.
"Investors have been reluctant to embrace aggressive risk-off trades because they foresee a relief rally once a deal is made, i.e. when it's clear there won't be a default," analysts at Societe Generale wrote in a note.
"The risk however is that we get a toxic deal, one way or the other: the deal could simply raise the debt ceiling a bit, forcing further negotiations ... This would cause policy uncertainty and hurt the economy. Or the deal may include a further tightening of fiscal policy."
U.S. Standard & Poor's 500 e-mini futures dipped 0.1 percent in early Asian trade after the cash index <.SPX> ended down 0.9 percent on Monday and dropped for the 10th time in the past 13 sessions. U.S. Treasury futures added 2 ticks.
U.S. govt shutdown effect: http://link.reuters.com/cap63v
The dollar <.DXY> was steady at 79.914 against a basket of major currencies after slipping 0.2 percent overnight to not far from an eight-month trough touched last week.
Against the yen, the greenback held steady at 96.75 yen after falling as much as 0.2 percent to 96.55 yen, hitting an eight-week low earlier in the Asian session.
It dropped 0.8 percent overnight to mark its biggest decline against the Japanese currency since Sept. 18, when the Federal Reserve shocked investors by deciding to continue its stimulus programme.
"In the shorter-term, with financial sector stress increasingly looking like a necessary ingredient to forcing a negotiated solution in Washington, we think risks lie to the yen upside," analysts at BNP Paribas wrote in a note, though they remained optimistic that the U.S. fiscal crisis will be resolved.
Gold , seen as a safe-haven, inched up 0.1 percent to around $1,322 an ounce, adding to Monday's 0.8 percent rise, while the political wrangling in Washington's impact on economic growth kept pressure on oil prices, with Brent crude down 0.2 percent to $109.50 a barrel.
(Editing by Shri Navaratnam and Eric Meijer)
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