FOREX-Dollar rises but gains seen capped by U.S. budget impasse
* Dollar slips, wariness over possible U.S. govt shutdown
* Euro hurt by renewed Italian political tensions
* Japan corporate tax-cut hopes lead to yen-selling
NEW YORK, Sept 26 (Reuters) - The dollar advanced on Thursday after weekly jobless claims data showed an improving U.S. labor market, which could support a wind-down of the Federal Reserve's bond buying later this year. The greenback was also helped by the euro's losses amid political uncertainty in Italy, the euro zone's third largest economy. But the dollar's gains are expected to be limited as an ongoing impasse in U.S. budget negotiations could lead to a possible federal debt default. "The expectation is that tapering will still occur given the underlying strength in the U.S. economy. The timing of that tapering is still in question, but the direction has never been in doubt," said Lane Newman, director of foreign exchange at ING Capital Markets in New York. In early New York trading, the dollar was up 0.2 percent against a basket of currencies at 80.525, but not far from a 7-month trough of 80.06 hit on Sept. 18. "Bigger picture, the focus reverts back to the U.S. budget impasse, which is negative for equities and negative for investments," Newman said. Investors were wary of buying the dollar while the U.S. Congress struggled to avert a government shutdown next week. Still, many analysts believed this would be resolved, as with previous budget standoffs. The dollar has also struggled since the Fed stunned markets recently by deciding not to scale back its massive stimulus, which raised the question of whether markets have been too optimistic on the U.S. economy. U.S. jobless claims came in much better than expected, with 305,000 in the latest week, a six-year low. The reading gives a clearer view of the labor market's health after an update in government computer systems in California and Nevada threw claims data into disarray earlier this month. "The dollar...found an overall tailwind in unsurprisingly solid news on America's job market which keeps a Fed taper on the table for possible use in late October," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. The euro, meanwhile, fell against the dollar after center-right deputies in Italy, supporting Silvio Berlusconi, renewed threats to resign if their leader is expelled from parliament following a tax fraud conviction. The euro was down 0.2 percent at $1.3503. Against the yen, the dollar was up 0.5 percent at 98.95 yen. Large options expiries were reported at 95.0 yen, 99.0 yen and 100.0 yen. The dollar earlier rose to as high as 99.12 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. A government source told Reuters last week that Japan will consider cutting corporate taxes and ending a temporary tax hike earlier than scheduled, to cushion the economy from a scheduled sales tax increase. That would add up to more stimulus than previously expected for the economy, which is negative for the yen, helping push Japan's benchmark stock index, Nikkei, higher. "Corporate tax cut helped the Nikkei. Given the Nikkei's correlation with dollar/yen, this helped the pair this morning," said Kiran Kowshik, currency strategist at BNP Paribas.