GLOBAL MARKETS-Dollar falls but most investors calm over U.S. shut down
* Dollar slides as U.S. government shutdown begins
* Equity and debt markets hold firm on hopes of early resolution
* Gold edges higher on limited safe haven demand
* Italian debt slides ahead of key government vote
LONDON, Oct 1 (Reuters) - The first U.S. government shutdown in 17 years weakened the dollar on Tuesday, sending it to an eight-month low against the euro, but otherwise left equity and debt markets little changed.
Investors tended to view the shutdown as temporary, and also as something that may further delay the U.S. Federal Reserve's plans to start closing downs its monetary stimulus.
U.S. Federal government agencies have been directed to cut back services after lawmakers failed to pass a temporary spending bill before a midnight deadline, threatening the salaries of around a million workers.
"No one really knows when they are going to get their act together, so you would have thought there would have been more of a reaction than there has been," said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.
The dollar was bearing the brunt of the response, falling to a 1-1/2 year low against the safe-haven Swiss franc and an 8-month low against a basket of major currencies. The weakness lifted the euro to an 8-month high of $1.3589.
However, MSCI's world equity index, tracking shares in 45 countries, had gained 0.2 percent by mid-morning in Europe, although this followed its biggest daily fall of September on Monday as investors anticipated the shutdown.
Europe's broad FTSEurofirst 300 index inched up 0.25 percent but was still near a three-week low. U.S. stock index futures pointed to gains when Wall Street opens with the broad S&P stock contract edging up 0.4 percent.
"The U.S. shutdown is a central point for the markets, but as long as the hope for just a temporary shutdown exists, it will not be a strong burden for equities," Christian Stocker, equity strategist at UniCredit said.
A bigger issue facing investors is the U.S. shutdown's implications for this month's negotiations on raising the U.S. government's $16.7 trillion borrowing limit, needed to avoid a default on its outstanding debt mountain.
Markets were also absorbing mixed readings on economic activity across the manufacturing sector for September and an announcement of a $50 billion stimulus package in Japan, designed to offset the impact of a sales tax hike next April.
Japan's move came after a closely-watched central bank survey showed sentiment among domestic manufacturer's had improved sharply in the three months to September to reach a near six-year high.
A separate euro zone factory activity survey revealed growth, albeit at a slower pace than previously. In China, factories expanded only slightly last month, raising questions over the strength of its nascent recovery.
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In fixed income markets, prices of German government bonds, normally seen as a safe haven by investors in times of uncertainty, fell on Monday, lifting yields 2.5 basis points . This mirrored a fall in U.S. Treasury 10-year notes, which sent yields up 3 bpts to 2.65 percent.
Gold, another traditional safe haven asset, popped higher after the shutdown became apparent, hitting $1331.50 an ounce, though was well within its recent $1,300 to 1,350 range.
"(The muted market response) is a sign it has already priced in the negative economic impact of the government shutdown but obviously has not priced in, at least at this point, the consequences of a failure to raise the debt ceiling," Elwin de Groot, senior market economist at Rabobank said.
Meanwhile Italian bonds were rising a day before Italy's Prime Minister Enrico Letta was due to face a vote of confidence in a bid to draw a line under growing political tensions that have threatened the ruling coalition.
The yield on the benchmark 10-year Italian government bond fell 2.5 basis points at 4.55 percent though traders said talk of further liquidity support from the European Central Bank could also be helping.
The ECB holds a policy meeting on Wednesday and is expected to stick to its accommodative policy course..
Brent crude fell to around $108 a barrel to be near a 7-week low on worries that the U.S. government shutdown may crimp oil demand.
Brent crude for November fell 32 cents to $108.02 a barrel. U.S. crude was at $102.18, down 15 cents.