SYDNEY The dollar was subdued in Asia on Tuesday and vulnerable against safe-haven currencies with Washington still locked in a bitter struggle just hours ahead of a midnight deadline that will see much of the U.S. government begin to shut down.
The standoff comes a few weeks ahead of the next political battle to raise the federal government's borrowing authority. Failure to do so by mid-October could result in a historic U.S. debt default that could cripple the world's biggest economy and send shockwaves around the globe.
"If a shutdown is not averted, we would expect the USD to move lower versus the core, low yielding currencies, and to gain ground versus emerging markets and commodity bloc currencies," analysts at BNP Paribas wrote in a client note.
Overnight action was surprising as the dollar actually bounced off a one-month low on the yen. Yen bulls turned tail with Japan's Prime Minister Shinzo Abe expected to announce a hike in the national sales tax on Tuesday and also launch an economic stimulus package.
The dollar traded at 98.33 yen, having climbed off a one-month low of 97.50 on Monday.
The euro staged a rebound on news that as many as 20 senators from Silvio Berlusconi's centre-right party were ready to break away, dealing a blow to his plans to topple Prime Minister Enrico Letta's coalition government.
The common currency rallied to $1.3520 from Monday's trough of $1.3467 as investors scrambled to unwind bearish trades. Against the yen, the euro jumped to 133.01 from a three-week trough around 131.38.
The overall mood, however, remains one of caution and that is likely to keep some emerging market currencies as well as commodity currencies under pressure.
The Australian dollar traded at $0.9314, having fallen as far as $0.9280 on Monday. It's immediate focus is retail sales data due at 0130 GMT and the Reserve Bank of Australia's (RBA) interest rate decision at 0430 GMT.
The RBA is widely expected to keep its cash rate unchanged at a record low 2.5 percent, although it may reintroduce an explicit easing bias to help cap the Aussie dollar.
It is hoping that a weaker currency will help spur other parts of the economy to offset slower spending in the mining sector.
Investors are also keeping an eye on the official reading of China's manufacturing activity due at 0100 GMT. On Monday, a private survey showed only modest growth in the factory sector, suggesting a firm rebound in Asia's economic powerhouse still remained elusive.
(Editing by Shri Navaratnam)
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