* Dollar sags but manages to hold above 3-year lows
* US govt shutdown seen to have been priced in
* Treasury yields at 3-1/2-yr highs, support dollar
* Pound slips after 7 days of gains on weak UK retail sales (Updates time of delayed U.S. Senate vote in 3rd paragraph)
By Shinichi Saoshiro
TOKYO, Jan 22 (Reuters) - The dollar regained some footing on Monday after slipping earlier on a U.S. government shutdown, supported by higher Treasury yields, while investors took a relatively calm view of the Washington wrangling.
The U.S. government shutdown took effect at midnight on Friday after Democrats and Republicans, locked in a bitter dispute over immigration and border security, failed to agree on a last-minute deal to fund government operations.
In order to break the impasse, Republican and Democratic leaders of the U.S. Senate held talks on Sunday.
Senate Majority Leader Mitch McConnell said late on Sunday that an overnight vote on a measure to fund government operations through Feb. 8 was cancelled and would instead be held at 12 p.m. (1700 GMT) on Monday.
“The market is accustomed with what is taking place in U.S. politics. It is not reading too far into the shutdown, which is more like a political show,” said Koji Fukaya, president of FPG Securities in Tokyo.
The dollar’s index against a basket of six other major currencies initially dipped to hit 90.155 but was last up 0.1 percent at 90.665, managing to hold above the three-year trough of 90.113 set on Thursday.
The euro was a shade lower at $1.2221 after climbing to $1.2275 but failing to regain the three-year peak of $1.2323 that it scaled on Wednesday.
“The dollar’s losses have been limited as negotiations going into Friday were proving difficult and the market had time to price in a U.S. government shutdown,” said Shin Kadota, senior strategist at Barclays in Tokyo.
“The shutdown is also not expected to last a very long time. That said, if the shutdown stretches out to several weeks, then we would have to start worrying about the negative impact on the U.S. economy.”
The dollar pared its earlier losses and was little changed at 110.860 yen, still some distance from a four-month low of 110.190 plumbed on Wednesday.
The greenback received some support from higher U.S. yields.
The 10-year Treasury yield extended Friday’s rise and touched a 3-1/2-year high of 2.672 percent. The debt market had been on the defensive through much of last week in the wake of a rally in risk asset markets.
“A reverse correlation has been in place for a while between Treasury yields and the dollar, but there are signs that the disconnect between the two is finally beginning to reverse,” Fukaya at FPG Securities said.
The Australian dollar was little changed at $0.7989 and the New Zealand dollar was steady at $0.7277.
The pound dipped 0.3 percent to $1.3862, pulling away from a 1-1/2-year top of $1.3942 reached on Wednesday following Friday’s disappointing UK retail sales data.
Before Friday’s fall sterling had gained against the dollar for seven straight sessions, with traders welcoming positive noises from the European Union about Brexit negotiations.
Reporting by Shinichi Saoshiro; Editing by Shri Navaratnam and Eric Meijer
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