US deadlock hits dollar, weakens shares

US deadlock hits dollar, weakens shares

LONDON - World stock markets began to shake on Wednesday in response to a US government shutdown that shows no signs of ending soon, also sending the dollar to a one-month low against the yen.

Investors have generally taken the view that the first such shutdown in 17 years would prove temporary, but there are growing worries about its implications for talks on raising the US public debt ceiling later this month.

While the shutdown would have to drag on to have a substantial effect on the United States economy, a failure to raise the debt ceiling carries the threat of a government default on its debt with wide and unpredictable consequences.

"We do fear that as this discussion drags on, volatility in the market will continue to increase," said Patrick Moonen, senior equity strategist at ING Investment Management.

The dollar had already suffered on Tuesday as the shutdown began and it fell another 0.6 per cent against the yen, seen as a safe haven by investors in times of political strife, to 97.36 yen - its lowest since late August.

The euro also drew support from events in Washington but is hampered by an economic outlook that may yet provoke more action - or at least the threat of action - from the European Central Bank, meeting on Wednesday in Paris.

The latest round of political turmoil in Italy has not helped the region's prospects - although there are signs that Prime Minister Enrico Letta may be on the verge of assembling enough support to keep his government in power and fend off elections for now.

By 0900 GMT, the euro was up about 0.1 per cent at $1.3554, nearing an 8-month high touched a day earlier.

Global equities, as measured by MSCI's world equity index .MIWD00000PUS, were down 0.3 per cent after starting the new quarter with a 0.9 per cent gain on Tuesday.

US stock futures eased 0.2 per cent signaling further weakness ahead while Europe's FTSE 300 index .FTEU3 shed 0.75 per cent and Asian shares outside Japan .MIAPJ000PUS rose 0.3 per cent.

"With the US shutdown, everyone is hoping for the best," said Luca Jellinek, head of European interest rates strategy at Credit Agricole CIB. "But none of us are political analysts, so the market has suspended judgment until we see what happens."

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