Asian stocks ease in cautious trade

By Ian Chua

SYDNEY (Reuters) - Asian stocks eased, while the dollar nursed losses on Wednesday with investors still clinging to hopes that Washington will reach an 11th hour deal to avert a default even as a deadline to lift the government's borrowing limit drew closer.

Adding pressure for a breakthrough before the October 17 deadline, Fitch Ratings warned it could cut the United States' prized AAA credit rating.

MSCI's broadest index of Asia-Pacific shares outside Japan edged down 0.1 percent, retreating from a five-month closing high. Australian stocks slipped 0.5 percent in early trade.

"With just 30 hours to go until the deadline, nerves will be playing on traders' minds as they will continue to be on U.S. political headline-watch. As a result, trade will be extremely choppy until we get an outcome," said Stan Shamu, market strategist at IG in Melbourne.

If Washington doesn't reach a deal by October 17, the government by law will no longer be able to add to the national debt, and will have to rely on incoming revenue and about $30 billion in cash to pay the nation's many obligations.

That money is expected to run out quickly and Washington would start missing payments in the weeks ahead. A global financial crisis could follow if investors decide that U.S. debt, used as collateral for trillions of dollars in financial deals, were no longer worth holding.

The Republican-led U.S. House of Representatives has failed so far to produce a plan to lift the threat of a government default and has abandoned plans to vote on any measure on Tuesday.

Given the dire consequences of a historic U.S. default, markets are surprisingly resilient with some traders saying investors are finding it hard to price in an Armageddon scenario.

U.S. S&P 500 e-mini futures were steady, having fallen 0.7 percent.

The dollar index, which tracks the greenback's performance against a basket of currencies, was little changed around 80.438 after retreating from a one-month high.

"Like a competitive basketball game where nothing happens before the fourth quarter, the current budget negotiations are coming down to the wire," analysts at JPMorgan wrote in a client note.

(Editing by Shri Navaratnam)