Fiscal Impasse Weighs on Global Markets

Faint signs of movement in a U.S. fiscal standoff helped the dollar edge away from an eight-month low on Tuesday but failed to provoke much reaction in world share and oil markets.

A White House spokesman said on Monday it would accept a short-term increase in the nation's borrowing authority to avoid a default. An influential Senator was also said to be floating a plan to cut federal spending and reform the U.S. tax code as part of a broader deal.

As the partial U.S. government shutdown runs into a second week, investors still believe that Republicans and Democrats will reach a deal on the budget as well as the debt ceiling, but are wary of the risk that it may not happen.

"Everyone thinks it will get resolved, but the fear is that at the last minute it might not," Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge, said.

Matwejev said it was also likely that any hint of an deal would be met with a strong rally in riskier assets. Such expectations have helped prevent any major selloff while the negotiations drag on.

MSCI's world equity index .MIWD00000PUS, which tracks shares in 45 countries, was little changed and not far from a five-year high. Benchmark Brent crude oil was stuck right in the middle of its recent narrow trading range between $109 and $110 at around $109.53 a barrel.

The dollar recovered from a fresh two-year low against the Japanese yen to be up 0.4 percent at 97.10 yen, having earlier touched 96.55 yen, its lowest since August 12.

The dollar index, which measures the U.S. currency's value against a basket of currencies, .DXY, was still within striking distance of last week's eight-month low of 79.627 and traders said it remained vulnerable to further selling.

The longer the political deadlock runs, the greater is the expected economic damage and the more likely it becomes that the Federal Reserve will continue for longer a stimulus program that has flooded global markets with dollars.

America's biggest creditors, China and Japan, have also said they are increasingly worried that the developments in Washington could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.

"The risk is to the downside for the dollar as long as we don't have an agreement," said Niels Christensen, currency strategist at Nordea.

GOLD GAINS

European equities traded lower after ending in negative territory for three of the last four trading sessions. The broad FTSE Eurofirst 300 index .FTEU3 dipped 0.2 percent.

The U.S. anxiety - and the broadly softer dollar - has helped support gold, which extended gains into a second day on Tuesday to trade up 0.3 percent at $1,325 an ounce.

Gold also saw some support from Chinese buyers returning after a week-long National Day holiday. China is the world's second-biggest gold consumer after India. <GOL/>

The worries over the U.S. fiscal impasse largely overshadowed data from China showing business confidence in the countries services sector had slipped in September though the economy remained on course for expansion.

Copper prices, which are very sensitive to Chinese data due to the country's heavy demand for the metal, were little changed and stayed within the $7,000-$7,500 a tonne (1 tonne =1.102 metric tons) range seen since early August.

(Additional reporting by Jessica Mortimer. Editing by)