Asian shares edged higher on Tuesday, bouncing back from a slide the previous day, after U.S. stocks posted only modest losses in reaction to the worsening deadlock in Washington over raising the debt limit and avoiding a technical bond default.
The dollar fell to a record low against the safe-haven Swiss franc in early trade as President Barack Obama delivered a prime-time address to Americans, warning that a default on U.S. bond obligations would be a "reckless and irresponsible outcome."
Investors have showed few signs of panic even as Republicans and Democrats have failed to bridge their differences with just a week to go to the Aug. 2 deadline the U.S. Treasury has set for when it may fail to pay out on Treasuries.
The market reaction to a sudden breakdown in talks over the weekend was relatively mild and limited given the threat of a technical default and a potential cut in the United States' top-notch AAA credit rating.
The S&P 500 shed 0.6 percent by the end of Monday, but U.S. stock futures had been down 1 percent earlier in the day.
Some market players were taking no chances, shifting funds into safe-haven gold and the Swiss franc -- driving both to record peaks against the U.S. dollar. Gold was steady in early trade at $1,613.50 an ounce.
"The unfolding US debt ceiling drama should add to the headwinds for market risk sentiment, with a potential downgrade of the world's ultimate risk-free asset - the US Treasuries - fuelling more flight to quality into gold and Swiss franc," said currency analysts at Citigroup in a note to clients.
But portfolio managers and traders have long believed that an agreement would be reached in Washington at the last minute, and that even a technical default or rating downgrade may only cause short-term market volatility rather than a full-fledged crisis.
Asian bonds, currencies and even shares have been one of the beneficiaries from all the debt trouble in Europe and the political gridlock in the United States, with investors viewing its stronger growth and fundamentals as a relative safe-haven.
The MSCI index of Asia-Pacific shares outside Japan was up 0.3 percent in early trade and is up about 1 percent on the month and year, withstanding the occasional bouts of volatility from the U.S. deficit debate and euro zone debt crisis.
Japan has also benefited as its big automakers and manufacturers have recovered more quickly than expected from the March 11 earthquake and tsunami.
Japan's Nikkei average inched up 0.1 percent, thanks in part to solid earnings from blue-chip companies such as Canon despite the yen's persistent strength.
In currencies, the dollar dipped in early trade after having gained the previous day. Bond yield spreads on Spain and Italy worsened on Monday as a relief rally after European leaders agreed to a second bailout for Greece fizzled.
The euro drifted up 0.1 percent to $1.4390 from near $1.4378 in late New York trade. The dollar edged down slightly to 78.20 yen and also slipped back towards a record low of 0.8021 Swiss francs struck the previous day.
The dollar index -- a gauge of its performance against a basket of currencies -- was flat at 74.041 .
Option markets -- where investors typically hedge themselves against potential risks -- were also showing no signs of panic across the dollar, S&P futures and Treasury futures.
While the closely watched VIX index of S&P implied volatility ticked up on Monday to 19.35, it remains off peaks of 24.65 and 31.28 struck earlier this year. Implied volatility on Treasury futures was also higher this month but historically subdued.
U.S. Treasuries steadied after sliding the previous day, with long-term Treasuries under the most pressure from the worries about a rating downgrade.
Ten-year notes were up 2/32 in price to yield 2.997 percent, down a basis point. Thirty-year bonds found their footing and gained 6/32, pulling their yields down a basis point to 4.308 percent. (Editing by Kim Coghill)