* 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, helps limit USD losses
By Shinichi Saoshiro
TOKYO, Jan 22 (Reuters) - The dollar sagged against its peers on Monday as a U.S. government shutdown dented sentiment, although losses were limited for now as investors took a wait-and-see stance on developments in Washington.
The shut down came into 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. The Senate was expected to vote at 0600 GMT on whether to advance a measure to fund the government through Feb. 8.
The dollar index against a basket of six major currencies was 0.1 percent lower at 90.490 but managed to hold above a three-year trough of 90.113 set on Thursday.
The euro rose 0.2 percent to $1.2252, stopping short of a three-year peak of $1.2323 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 to the U.S. economy.”
The dollar was 0.15 percent lower at 110.685 yen, still some distance from a four-month low of 110.190 plumbed on Wednesday.
Despite the headwinds from the political impasse in Washington, the greenback received some support from higher U.S. yields.
The 10-year Treasury yield rose to a 3-1/2-year high of 2.663 percent on Friday with the debt market having been on the defensive through much of last week in the wake of a rally in risk asset markets.
The Australian dollar climbed 0.2 percent to $0.8001 and the New Zealand dollar advanced 0.15 percent to $0.7289.
The pound dipped 0.1 percent to $1.3889, pulling away from a 1-1/2-year top of $1.3942 reached on Wednesday. (Reporting by Shinichi Saoshiro; Editing by Shri Navaratnam)