FOREX-Dollar little changed as hopes for U.S. budget deal rise slightly
* Expectations grow for an 11th-hour budget deal
* Budget hopes feed bid for "small amounts of risk"
* Above-forecast Chicago PMI data also supports dollar
* Political crisis in Italy weighs on euro
NEW YORK, Sept 30 (Reuters) - The dollar was little changed against other major currencies on Monday, paring earlier losses, as hopes grew that U.S. lawmakers will reach a deal and avert a partial government shutdown as the Washington budget battle hurtled toward a midnight deadline.
The law that funds thousands of routine government activities is set to expire at midnight, as Republicans seek to defund President Barack Obama's healthcare law.
"There are some expectations of an 11th-hour deal reached on the crisis," said Richard Cochinos, head of Americas G10 currency strategy at Citigroup in New York.
"That would be positive for stocks and risky assets. It has already led markets to buy small amounts of risk -- meaning dollar/yen, kiwi/dollar, euro/dollar are higher as we head into the end of the New York close," he said.
In a further sign talks would continue through the evening, the U.S. Senate Democrats, who control the chamber, voted down a proposal by the Republican-led House of Representatives to delay Obamacare for a year in return for temporary funding of the federal government beyond midnight.
Earlier data showing activity in the U.S. Midwest picking up pace in September also helped underpin the dollar.
The Institute for Supply Management-Chicago business barometer rose to 55.7 from 53.0 in August. Economists in a Reuters poll had expected a reading of 54.0. A reading above 50 indicates expansion in the regional economy.
"The data today, meaning the Chicago PMI, was the second strongest print this year with a strong new orders component. That bodes well for ISM tomorrow," Cochinos said, referring to the release on Tuesday by the Institute for Supply Management of its September manufacturing index.
"The combination of the better data in the U.S. and the possibility of an 11th-hour deal has led to increased risk taking and net-net a dollar negative," he said.
The wrangling in Washington coincides with month-end and quarter-end currency positioning, adding to the see-saw trading.
The dollar last traded down 0.075 percent against a basket of six major currencies to 80.222, above an earlier trough of 80.030, its lowest since February.
The index, at current prices, has fallen about 2.3 percent in September, its worst month since October 2011. For the quarter it notched a roughly 3.5 percent loss, its weakest performance since the first quarter of 2011.
"The potential of a government shutdown could result in a sustained fiscal drag on the economy that could push out any monetary policy normalization by the Federal Reserve," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.
"Consequently, a government shutdown would likely weigh on the dollar, especially against traditional safe-haven assets like the Japanese yen and the Swiss franc," he said.
Against the yen, the dollar was last down 0.03 percent at 98.20 yen. The greenback is just barely positive for the month but down 0.88 percent for the quarter.
Against the Swiss franc, the dollar fell 0.2 percent to 0.9038 franc, not far from the level of 0.9018 franc hit last week, which was its lowest since April 2012.
The euro last traded flat against the yen, at 132.79 yen , having earlier fallen to a three-week low of 131.33 yen.
The euro was just barely up on the dollar, at $1.3523, up 0.1 percent.
The U.S. funding standoff is a harbinger of the next big political battle: a far-more consequential bill to raise the federal government's borrowing authority.
Failure to raise the $16.7 trillion debt ceiling by mid-October would force the United States to default on some payment obligations -- an event that could cripple its economy and send shockwaves around the globe. Such a scenario should cause further losses for the dollar.
In a Reuters poll of economists issued on Monday, 30 out of 52 respondents believe the political wrangling over the budget and the debt ceiling has not been a major contributor to the U.S. economy's lackluster recover from recession.
The euro earlier was weighed down by an Italian political crisis sparked by Silvio Berlusconi's withdrawal of his ministers from the government on Saturday and call for new elections, just seven months after the last vote.
Prime Minister Enrico Letta will seek support in a confidence vote, probably on Wednesday and the possibility of defections from Berlusconi's party could well help Letta avert new elections