FOREX-Dollar firms ahead of U.S. government shutdown deadline

October 1, 2013

* Congress still in a deadlock as shutdown deadline draws closer

* Yen pressured as Abe expected to raise sales tax, unveil stimulus

* Euro steady but Italian politics remain a major risk

* Aussie dollar firms ahead of RBA rate decision; China data disappoints

By Lisa Twaronite and Ian Chua

TOKYO/SYDNEY, Oct 1 (Reuters) - The dollar firmed against a basket of other major currencies as well as the yen on Tuesday as investors kept a close eye on Washington ahead of a midnight deadline after which much of U.S. government could begin to shut down.

The standoff comes a few weeks ahead of the next political battle to raise the federal government's borrowing authority. Failure to do the latter by mid-October could result in a historic U.S. debt default that would threaten the world's biggest economy and reverberate around the globe.

The dollar index added about 0.1 percent to 80.291, lifted by the greenback's performance against its Japanese counterpart. The dollar added 0.3 percent to 98.53 yen, moving away from a one-month low of 97.48 yen hit on Monday, according to Reuters data.

The yen remained under pressure, with Japan's Prime Minister Shinzo Abe expected to announce a hike in the national sales tax on Tuesday and also launch an economic stimulus package.

The Bank of Japan's quarterly "tankan" survey of business sentiment earlier on Tuesday was stronger than expected, cementing the case for Abe to proceed with the planned sales tax hike next year.

"Overall, though, it seems that the increase in the consumption tax is already decided, and the tankan results did not contain anything to alter this decision," said Ayako Sera, market economist at Sumitomo Trust and Banking.

Downbeat data from China added to the appeal of most safe-haven currencies.

China's official Purchasing Managers' Index (PMI) stood at 51.1 last month from August's 51.0, below expectations in a Reuters poll for a rise to 51.5, as small firms struggled in the face of overcapacity and weak demand. That added to concerns a nascent economic recovery there may be foundering.

The euro was steady after staging a rebound overnight on news from Italy that as many as 20 senators from Silvio Berlusconi's centre-right party were ready to break away, dealing a blow to his plans to topple Prime Minister Enrico Letta's coalition government.

The common currency stood at $1.3524 after rallying from Monday's trough of $1.3466, according to Reuters data, as investors scrambled to unwind bearish trades. Against the yen, the euro rose 0.2 percent to 133.08 from a three-week trough of 131.33 yen plumbed on Monday.

The Australian dollar shrugged off the Chinese data and was slightly higher at $0.9327, moving away from Monday's low of $0.9280 on Monday. Trading was subdued as investors awaited the Reserve Bank of Australia's (RBA) interest rate decision at 0430 GMT.

The RBA is widely expected to keep its cash rate unchanged at a record low 2.5 percent. Some believe it may reintroduce an explicit easing bias to help cap the Aussie dollar, hoping that a weaker currency will help spur other parts of the economy to offset slower spending in the mining sector.