FOREX-Dollar gains but U.S. budget cliffhanger limits upside
* Dollar gains despite wariness over possible U.S. gov't shutdown
* Euro hurt by renewed Italian political tensions
* Barclays expects dollar to trade sideways with downward bias near term
* Japan corporate tax-cut hopes lead to yen-selling
NEW YORK, Sept 26 (Reuters) - The dollar notched broad gains on Thursday, recouping losses from the previous session, after stronger-than-expected U.S. weekly jobless claims data supported market expectations for a wind-down of the Federal Reserve's bond-buying stimulus program. The dollar's upside, however, should be limited in the near term as worries about a potential U.S. government shutdown and the possibility of a default are keeping investors cautious. U.S. House of Representatives Republicans refused to give in to President Barack Obama's demands for straightforward bills keeping the government running beyond Sept. 30. House Republicans also challenged Obama on the debt ceiling increase, the amount the government is allowed to borrow, that the Treasury Department says is urgently needed by Oct. 17.
In afternoon trading, the dollar was up 0.3 percent against a basket of currencies at 80.574, above a seven-month trough of 80.06 hit on Sept. 18. The dollar was buoyed by weekly data showing the level of initial jobless claims came in much better than expected, with a fall near a six-year low, suggesting a steadily improving labor market. The reading gave a clearer view of the labor market after the number of claims earlier in September may have been distorted as two states updated their computer systems. "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 dollar has 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. In another criticism about how the Fed handled the decision last week, Fed Governor Jeremy Stein said the Fed - the U.S. central bank - should make itself more predictable about scaling back its stimulus campaign. He maintained the Fed had confused markets by not tapering at its meeting last week. Stein said he would have been comfortable starting to reduce asset purchases at the Sept. 17-18 meeting, and that the decision to keep buying at an $85 billion monthly pace had been, for him, a "close call". "The Fed's decision to postpone tapering delays, but does not derail, our constructive dollar outlook," Barclays Capital said in a report. Barclays expects the delays to add $250 billion to the Fed's balance sheet and the bank therefore expects the dollar to trade sideways with a downward bias in the near term. Emerging market currencies have fared well from the Fed's bond-buying as investors plowed cash into higher-yielding assets. "For the first time in months, we think it is time to take profit on our short emerging market carry positions held since the start of the year," the bank said. Barclays believes a broad-based dollar rally against the major currencies, including the euro, will have to wait until the Fed begins to taper, which the bank expects in December, or until growth trends in the United States and EU re-diverge. The greenback on Thursday was also helped by the euro's fall on political uncertainty in Italy, the euro zone's third-largest economy. Italian center-right deputies, supporting former Prime Minister Silvio Berlusconi, renewed threats to resign if their leader is expelled from Parliament following a tax fraud conviction. The euro was last down 0.3 percent at $1.3482. Against the yen, the dollar was up 0.5 percent at 98.92 yen. The dollar earlier rose as high as 99.13 yen on a media report the Japanese government plans to say it will "urgently consider" cutting the corporate tax rate when it compiles a stimulus package next week. 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 Nikkei stock index higher.