FOREX-Dollar in the doldrums, fiscal wrangling takes toll
* Dollar index near 8 month low
* Fed tapering seen unlikely rest of year
* Tuesday's US payroll data one of next biggest focus
* In Asia, Chinese data likely to set tone
TOKYO, Oct 18 (Reuters) - The dollar nursed losses near an eight-month low against a basket of currencies on Friday as traders focused on the economic impact of an acrimonious showdown in Washington that dragged the U.S. to the brink of a debt default.
The potential damage to the economy from the weeks-long government shutdown could discourage the Federal Reserve from scaling back its stimulus programme at least until the beginning of next year.
"The markets are driven by expectations that the Fed will have to maintain its stimulus," said Sho Aoyama, senior market analyst at Mizuho Securities.
U.S. Democrats and Republicans reached an 11th-hour agreement on Wednesday to break the fiscal impasse. The deal funds the government until Jan. 15 and raises the borrowing limit through to Feb. 7.
The first wave of U.S. data released on Thursday after the government returned to work was fairly upbeat. But the main focus is squarely on the September payrolls report, which the Labor department said will be published on Tuesday.
The dollar index stood at 79.693 in early Asian trade, having fallen to as low as 79.613 on Thursday, its lowest level since early February.
The dollar's fall partially reflected the rise in risk-sensitive currencies as expectations of continued U.S. stimulus helped to boost Wall Street shares, with the S&P 500 index hitting a record high on Thursday.
The euro traded at $1.3669, having risen as high as $1.3682 on Thursday, just shy of this year's peak of $1.3711.
A daily close above that peak would be a very bullish development that is likely to lead to a test of $1.38233, a 61.8 percent retracement of the euro's decline from 2011 to 2012, George Davis, chief technical analyst at RBC Dominion Securities in Toronto, said in a report.
Against the yen, the euro held near four-year highs of 134.95 yen hit a month ago, trading at 134.02.
The dollar was on the defensive against the Japanese currency as fall in U.S. bond yields undermined the greenback's yield allure. The dollar stood at 98.01 yen, a full yen below a three-week high of 99.01 yen touched on Thursday.
Some market players also speculate the latest political paralysis in Washington might have dented long-term credibility in the dollar, with partisan wrangling looking set to return early next year when the current spending and borrowing agreement are set to expire.
"The dollar has traded very poorly on the back of the debt ceiling resolution," said Jens Nordvig, global head of currency strategy at Nomura in New York.
"It is hard to know if it is about a delay in growth and (Fed) tapering, or whether investors are starting to demand a political risk premium on the dollar. In any case, we are not inclined to trade the dollar from the bullish side at this point."
In Asia, a raft of Chinese economic data due later on Friday is in focus. Solid readings could push the Australian dollar higher to fresh four-month highs given China is Australia's major export market.
The Aussie changed hands at $0.9620, not far from Thursday's four-month high of $0.9647.