FOREX-Dollar rises vs yen, U.S. budget battle limits gains
* Japan corporate tax-cut hopes lead to yen-selling
* Dollar slips as US govt shutdown concerns leave traders wary
* Dollar index firms but remains not far off a 7-mth trough
LONDON, Sept 26 (Reuters) - The dollar gained versus the yen on Thursday on talk of more corporate tax reform in Japan, while a U.S. budget impasse weighed on the greenback against other currencies.
Against the yen, the dollar was up 0.6 percent at 99.02 yen, recovering from a one-week low of 98.27 yen touched earlier in the day. Large options expiries were reported at 95.00 yen, 99.0 yen and 100 yen.
The euro rose 0.5 percent at 133.82 yen after rising as high as 133.91 yen on EBS.
Investors were wary of buying the dollar, given worries about a possible federal debt default and the chances of a U.S. government shutdown next week. That left the dollar flat against a basket of currencies at 80.383, close to 7-month trough of 80.060 plumbed on Sept. 18.
But the market also refrained from aggressively selling the dollar which has rallied when past impasses were resolved as, on balance, this one is expected to be.
Still, congressional officials must reach a budget deal by Monday that would allow the government to keep running, but negotiations have been contentious so far.
"On a trade weighted basis, the dollar is under pressure with the (debt ceiling) debate coming to action. We expect this to continue if there is a further stalling in negotiations," said Chris Walker, strategist at Barclays Capital. "Markets expect a resolution to be announced by the end of the week."
The dollar, however, rose versus the yen on news that the Japanese government plans to say it will "urgently consider" cutting the corporate tax rate when it compiles a stimulus package next week, according to a media report.
"There was a Kyodo News headline this morning that Japan will urgently consider cutting the corporate tax rate, and while this was not new, and any change is unlikely to be implemented immediately, some took it as a fresh reason to sell yen," said Masashi Murata, senior FX strategist at Brown Brothers Harriman.
A government source told Reuters last week that Japan will consider cutting corporate taxes and ending a temporary tax hike earlier than scheduled, as a means to cushion the economy from a scheduled sales tax increase.
That would add up to more stimulus than previously expected for the economy, putting more yen in circulation.
Japan's benchmark stock index, Nikkei,, which has recently tended to rise when the yen falls, was also up.
Murata said that the yen's direction was largely determined by the difference in monetary policy outlooks, with Japan still on an emergency, ultra-loose setting while the U.S. Federal Reserve on balance is heading for the exit.
Still, the dollar has struggled since the Fed stunned markets last week by deciding not to scale back its massive stimulus yet, a decision which also cast some doubt on whether markets have been overoptimistic on the U.S. economy.
The final reading of U.S. second quarter gross domestic product is due later on Thursday, followed by a key non-farm payrolls report next week.
Stronger-than-expected data would likely reignite speculation that the Fed could announce a stimulus reduction in December, or even next month, supporting the dollar.