Dollar languishes at eight-month low, U.S. debt ceiling a worry

By Dominic Lau

TOKYO (Reuters) - The dollar languished at an eight-month low on Friday as a lack of progress in resolving the U.S. budget standoff raised concerns the crisis could merge with a more complex fight looming later this month to raise the U.S. borrowing limit.

Asian shares were likely to open weaker, with Japan's Nikkei index futures down 0.4 percent, after the U.S. S&P 500 overnight suffered its ninth loss in 11 sessions.

President Barack Obama met with Republican and Democrat leaders in Congress but reiterated in a speech that he would not meet Republican demands to scroll back provisions of his healthcare reform in exchange for reopening the government.

The U.S. benchmark shed 0.9 percent, although it climbed off its lows after the New York Times reported that House Speaker John Boehner told colleagues that he would not let the United States default on its debt.

The debt ceiling is far more important than a partial U.S. government shutdown, which began on Tuesday, since it could lead to an unprecedented default by the United States, an outcome the market assumes is unthinkable.

BNP Paribas analysts said it was increasingly possible that the standoff would continue until the debt ceiling deadline on October 17.

"Market reaction is likely to intensify going into that date however, with the dollar extending its slide versus yen, Swiss franc and the euro," they wrote in a note.

"The silver lining for the dollar is that it is already trading at a sizeable discount relative to short-term rates, suggesting that there will be plenty of scope for the dollar to rally on any positive outcome in Washington."

The shutdown has caused a delay in the release of the much watched nonfarm payrolls data, normally due out later on Friday. The data is a key piece of information for the Federal Reserve to consider when it will start to scale back its stimulus.

The dollar was also hurt by slower growth in the U.S. services sector in September.

The euro was steady at $1.36245 in early Asian trade, not far from an eight-month high of $1.36465 touched on Thursday. The common currency was also aided by an apparent lack of concern by the European Central Bank about the euro's recent strength and better-than-expected euro zone data.

Against a basket of major currencies, the greenback also languished at an eight-month trough.

The dollar stood at 97.25 yen, ahead of the outcome of a two-day Bank of Japan policy meeting, after hitting a five-week low of 96.93 on Thursday.

The BOJ is expected to maintain its massive stimulus and reiterate its upbeat view that the economy is strong enough to weather next year's sales tax increase without additional monetary policy measures.

Copper prices tumbled more than 1 percent and gold and oil fell too, as the slower service sector growth in September compounded worries about raw materials demand due to the U.S. budget crisis and government shutdown.

(Additional reporting by Ian Chua in Sydney; Editing by Richard Pullin)