FOREX-Dollar hits 8-1/2-month low on worries about U.S. economy
* Euro nears 2013 peak against greenback
* Fading expectations of Fed tapering this year hurt dollar
* Tuesday's U.S. September payrolls data is next focus
NEW YORK, Oct 18 (Reuters) - The dollar fell to eight-and-a-half-month lows against the euro and a currency basket on Friday on expectations the Federal Reserve will delay scaling back its monetary stimulus following this month's political battles over the U.S. budget.
Volume was thin as investors braced for a deluge of U.S. economic data next week now that the U.S. government was open following a two-week shutdown. The September nonfarm payrolls report is due on Tuesday.
Analysts said concerns about the negative impact of the shutdown on the U.S. economy and the likelihood of the Fed leaving its bond-buying program intact until well into next year would weigh on the dollar. That should give the euro the potential to rise toward $1.40.
Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, said the short-term budget fix forged on the eve of the debt ceiling deadline has also "treaded on dollar confidence as it could lead to renewed gridlock after the holidays."
The dollar index, which measures the dollar's value against a basket of currencies, fell to 79.478, its lowest since early February. It last traded at 79.625, flat on the day.
The index was down around 1 percent on the week, posting its biggest weekly decline since the week of Sept. 20, which came after the surprise Fed decision.
The euro rose to $1.3703 against the dollar, its highest since early February when it touched its 2013 peak of $1.3711. It was last at $1.3686, up 0.1 percent on the day and up 1 percent for the week, its best week since Sept. 20.
A little over a month ago, analysts were convinced the Fed was ready to take its first step to rein in five years of ultra-loose monetary policy for the world's biggest economy.
But the Fed unexpectedly left policy unchanged in September. This was followed by a partial 16-day halt in U.S. government spending in October, then a deal over the debt ceiling which leaves open further wrangling over the budget early next year.
Analysts at Citi said the euro could move closer to $1.40 in the near term due to the expected delay in the reduction of the Fed's stimulus. They expect the euro to be bought "as a safe haven and reserve proxy for the dollar."
The deal reached on Wednesday funds the U.S. government only until Jan. 15 and raises the borrowing limit through Feb. 7.
The first wave of U.S. data released on Thursday after the government returned to work was fairly upbeat.
September U.S. payrolls are due next week, with the market forecasting a jobs gain of 180,000, according to a Reuters poll.
"The market impact may be somewhat dimmed as investors do not believe the Fed has a critical mass of information to act materially different compared to the September decision," wrote UBS in a research note.
The dollar also struggled against the yen after a fall in U.S. bond yields undermined the U.S. currency's allure. It was slightly lower at 97.80 yen, below a three-week high of 99 reached on Thursday. The dollar has lost 0.8 percent against the yen this week, the worst week since Sept. 27.
But one-month dollar/yen implied volatilities fell to a nine-month low, which analysts said reflected expectations that the dollar was likely to remain within its recent trading range between 96.50 and 99 yen.
The Australian dollar rose to a four-month high, helped by data showing China's annual economic growth quickened to 7.8 percent in the third quarter. It last traded at US$0.9672, up 0.4 percent.