By Marc Jones
LONDON (Reuters) - World stocks and the dollar marked time on Wednesday as cautious investors focused on hopes that U.S. politicians would strike a last-minute deal to prevent the country defaulting on its debt.
U.S. Senate aides said after a chaotic day of negotiations on Tuesday that an agreement to lift the government's $16.7 trillion borrowing limit was near, although final details still needed to be worked out.
With markets wary over the eventual outcome, the cost of insuring one-year U.S. debt against default using credit default swaps hit its highest in over two years.
But the outline of a deal was enough to keep other parts of the financial markets steady, with morning falls on Europe's blue-chip index, the Euro STOXX 50 <.STOXX50E>, limited to 0.3 percent a day after it hit a 2-1/2 year high. <.EU>
The dollar also held its ground against a basket of currencies <.DXY> and U.S. stock index futures signaled a higher start on Wall Street later, when lawmakers will begin the final push for a deal.
"The markets have been going sideways for a while now and they seem pretty hopeful that we will have this compromise deal and that is what is getting us through this," said HSBC G10 currency strategist Daragh Maher.
"I am as hopeful as anyone but we will have to wait and see, and that is exactly what the market is doing, waiting and seeing."
If Washington does not reach a deal by Thursday, the U.S. government will by law 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 country's many obligations.
That money is expected to run out quickly and it would start missing payments in the weeks ahead. A global financial crisis could follow if investors decided that U.S. debt, used as collateral for trillions of dollars in financial deals, no longer provided adequate security.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> slipped 0.1 percent, having drifted in and out of positive territory, while Tokyo's Nikkei <.N225> edged up 0.2 percent.
With the consensus view among investors that a deal will be found in Washington, safe-haven German Bunds fell in line with benchmark 10-year U.S. Treasuries as European trading picked up, pushing yields to three-week highs.
Commodity traders were on the sidelines too, leaving copper lower and oil and bullion little changed. Copper last traded at $7,197 a tonne, Brent oil was steady at $110 a barrel, and spot gold stood at $1,278 an ounce.
"Today is definitely not the day to be conducting any serious business as traders across the globe will be hypnotized by their TVs/terminals and anxiously waiting for something to hit the news wires," Jonathan Sudaria, a trader at Capital Spreads in London, wrote in a client note.
Even should a deal be reached, it must clear the full Senate and possible procedural snags on Wednesday before moving to the fractious House of Representatives, which was unable to produce its own deal on Tuesday.
Fitch Ratings warned it could cut the U.S. sovereign credit rating from AAA, citing the political brinkmanship over raising the debt ceiling.
With a large interest payment due at the end of the month and $58 billion in other obligations coming due the following day, many analysts have circled October 31 as a possible date for default if Congress has still failed to reach an agreement.
Elliot Clarke, an economist at Westpac Bank in Sydney, said the key date to watch out for was November 15, when $30 billion of interest payments are due.
"Moody's and S&P have ruled that a default will only occur if interest payments are missed. Consequently 15 November becomes the critical date," he said.
"How the market will respond to such a scenario is unknown as we have never really experienced such an event."
In Washington, the Senate was scheduled to meet at noon (1600 GMT) in a bid to nail down a deal, and the House at 10:00 a.m.
In Europe, Italy's new budget plans and robust British jobs data were attracting attention.
Sterling briefly hit a one-week high of $1.6064 against the dollar and 84.28 pence per euro as a steady unemployment number was followed by one of the Bank of England's policymakers saying he expected UK growth to continue to power upward this year.
Milan stocks continued a recent outperformance too, rising 0.5 percent versus a fall of 0.4 percent on the pan-European FTSEurofirst 300 <.FTEU3>, as investors gave a tentative thumbs-up to a 2014 budget containing tax and spending cuts aimed at stimulating the recession-bound economy.
"I don't want to make dramatic claims but this is a significant step in the right direction, with lower taxes for companies and workers," Prime Minister Enrico Letta told reporters during a break a the cabinet meeting.
(Editing by Catherine Evans, John Stonestreet)