Dollar, stocks fall as U.S. spending deadline nears

By Herbert Lash

NEW YORK (Reuters) - Global equity markets fell and the dollar hit a 7 1/2-month low against the safe-haven Swiss franc on Friday as a potential shutdown of U.S. government operations next week and a possible debt default several weeks later unsettled investors.

Washington braced for a partial shutdown on October 1 as Congress struggled to pass an emergency spending bill that Republicans want to use to achieve Tea Party-backed goals, such as defunding the new healthcare reform law.

The Senate was on track to pass legislation keeping the federal government operating beyond midnight Monday, but doubt remained about how and when it would be received in the Republican-controlled House of Representatives.

"As this deadline approaches, investors are stepping up their sale of dollars on the growing concern that a government shutdown will undermine the quality of U.S. assets and lead to a retrenchment in U.S. growth," said Kathy Lien, managing director at BK Asset Management in New York.

Congress also faces the hard task of raising the limit on federal borrowing authority, which Republicans are targeting for controversial add-ons.

Without a debt limit increase by October 17, Treasury Secretary Jack Lew has warned, the United States would have a difficult time paying creditors and operating the government.

The cost of insuring against a U.S. default rose to its most expensive level since May. Investors would have to pay about $31,500 to insure $10 million worth of Treasuries against a default in five years, up from $22,000 a week ago in thinly traded CDS market.

Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey, said as the weekend approaches, tensions were mounting over the haggling in Washington.

"Until there's greater visibility, the market is going to be choppy and erratic," Bakhos said.

The dollar fell against both the yen and the euro, as well as the safe-haven Swiss franc. The dollar index was down 0.37 percent to 80.223 against a basket of other major currencies.

Most major indices fell, with the exception of Brazil's' Bovespa index, which rose slightly.

MSCI's all-country world equity index fell 0.22 percent, and the FTSE Eurofirst 300 index of leading European shares fell 0.28 percent to a provisional close of 1,254.03.

The Dow Jones industrial average was down 71.41 points, or 0.47 percent, at 15,256.89. The Standard & Poor's 500 Index was down 6.92 points, or 0.41 percent, at 1,691.75. The Nasdaq Composite Index was down 3.60 points, or 0.10 percent, at 3,783.82.

Sterling rose to $1.6133 against the dollar after Bank of England Governor Mark Carney was quoted as saying he saw no need for more bond-buying by the central bank given signs of recovery in the British economy.

The remarks helped push the dollar lower.

Economic data was mixed.

U.S. consumer sentiment slid in September to its lowest in five months as consumers saw higher interest rates and sluggish economic growth ahead, a survey showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment slipped to 77.5 in September from 82.1 in August - the lowest final reading since April.

U.S. household spending rose in August as incomes were buoyed by solid wage gains, suggesting growing momentum in the U.S. economy despite months of reduced government spending.

American families spent 0.3 percent more last month than the month before, which was in line with the median forecast in a Reuters poll, Commerce Department data showed.

U.S. Treasuries prices rose on concerns about the implications of a U.S. government shutdown.

Benchmark 10-year Treasury notes were up 9/32, their yields easing to 2.6136 percent.

Brent crude oil seesawed in choppy trading.

Brent crude oil for November fell 70 cents to $108.51 a barrel.

U.S. crude for delivery in November fell 18 cents to $102.85 a barrel.

(Reporting by Herbert Lash; Additional reporting by Richard Hubbard in London, Gertrude Chavez-Dreyfuss and Rodrigo Campos in New York; Editing by Kenneth Barry and Diane Craft)