By Dominic Lau
TOKYO (Reuters) - The dollar held steady on Tuesday even though much of the U.S. government was due to start shutting down after Congress failed to find a compromise on a bill to fund government operations.
Competing spending measures flew back and forth between Republican-controlled House of Representatives and Democratic-led Senate late into Monday night in Washington but Congress deadlocked over Republican efforts to use the temporary spending bill as a way to delay implementation of President Barack Obama's health care programme.
It comes a few weeks ahead of the next political battle to raise the federal government's debt ceiling. Failure to do the latter by mid-October could result in a historic U.S. debt default that would threaten the U.S. economy and send ripples around the globe.
S&P stock futures inched up 0.2 percent, unchanged from earlier price action after the cash index fell 0.6 percent on Monday, while U.S. Treasury futures slipped 5 ticks.
As many as one million U.S. federal employees could face unpaid furloughs, but a shutdown would be unlikely to affect the United States's sovereign credit rating.
Investors are accustomed to political battles in Washington resulting in a last-minute accord and voiced scepticism any shutdown would last for an extended period.
"It may have a knock-on effect on the timing of the potential tapering (by the Federal Reserve). It could have a knock-on effect on the production of economic data. It could have a real impact on consumption if it lasts for more than a day," said a senior trader at a foreign bank in Tokyo.
"People in the market are kind of interpreting this as a kabuki drama if you like, but we are little more concerned than that."
The dollar was down 0.1 percent against a basket of currencies. It was steady at 98.15 yen, having climbed off a one-month low of 97.50 on Monday as Japan's Prime Minister Shinzo Abe was expected to announce his economic growth and tax strategy later on Tuesday.
Japanese manufacturers' sentiment improved sharply in the three months to September to a near six-year high, a closely-watched central bank survey showed on Tuesday, cementing the case for Abe to proceed with a planned sales tax increase next year.
"This is very constructive in terms of the assessment of the current economic situation. There is no reason that Prime Minister Abe should stop raising the (sales) tax," said Masamichi Adachi, senior economist at JPMorgan in Tokyo.
Japan's Nikkei share average rose 0.3 percent after climbing as much as 1.3 percent earlier in the session.
MSCI's broadest index of Asia-Pacific shares outside Japan added 0.2 percent, though it was still not too far away from a two-week low after it slid 1.5 percent in the previous session. Regional trading activity was expected to be light with China and Hong Kong closed for National Day holiday.
China's manufacturing growth edged up only slightly last month with the official Purchasing Managers' Index rising to 51.1 from August's 51.0, but below expectations and adding to worries that its economy recovery has foundered.
In the commodity markets, gold edged up 0.2 percent to $1,329 an ounce after gaining 7.6 percent in July-September, reversing three straight quarters of decline.
Brent crude dipped 0.6 percent to around $107.7 a barrel after gaining 6 percent in the third quarter, also ending a three-quarter losing streak.
(Additional reporting by Ian Chua in Sydney; Editing by Eric Meijer)
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