* U.S. govt shutdown to start after negotiations fail
* Yen bounces off one-month high ahead of PM's tax plan
By Dominic Lau
TOKYO, Oct 1 (Reuters) - The dollar held near a 7-1/2 monthlow against a basket of currencies on Tuesday as much of theU.S. government began to shut down after Congress failed toagree a compromise bill to fund government operations.
Competing spending measures flew back and forth betweenRepublican-controlled House of Representatives andDemocratic-led Senate late into Monday night in Washington butCongress deadlocked over efforts by some Republicans to use thetemporary spending bill to delay implementation of PresidentBarack Obama's health care programme.
The shutdown comes a few weeks ahead of the next politicalbattle; to raise the federal government's debt ceiling. Failureto increase the borrowing limit by mid-October could result in ahistoric U.S. debt default that would threaten the U.S. economyand send ripples around the globe.
"Risk assets have been sold off in the last few days aheadof the actual news of the shutdown," said Tim Condon, chiefeconomist for Asia at ING in Singapore. "It's already pricedin."
"The consensus view, which I share, is that the governmentcan remain shut down for a little while. They will come back andrevisit ahead of the debt ceiling debate. I think for now therewill be a cooling-off period."
S&P stock futures inched up 0.2 percent, unchangedfrom earlier price action after the cash index fell 0.6 percenton Monday, while U.S. Treasury futures slipped 4 ticks.
European shares were expected to open flat to slightlyhigher, with London's FTSE 100 seen opening up as muchas 0.1 percent and Frankfurt's DAX up as much as 0.3percent, according to financial bookmakers.
About a million U.S. federal employees could face unpaidfurloughs, but a shutdown would be unlikely to affect the UnitedStates' s sovereign credit rating.
Todd Elmer, Citigroup's currency strategist, said thepartial shutdown will delay the release of the nonfarm payrollsdata this Friday, a key indicator which the Federal Reserve willconsider as it decides on the timing of scaling back its massivestimulus.
"The bigger issue this raises is that the employment datahas the potential to be unusually muddled in the near term,which means divining the implications for Fed policy may be moredifficult," Singapore-based Elmer wrote in a note.
"All else being equal, additional uncertainty on the qualityof the data probably argues for the Fed to be more cautious, inaddition to potential policymaker concern on increased drag fromfiscal conditions."
But ING's Condon said the markets would find ways to gaugethe U.S. labour market even if the jobs report were to bedelayed.
"They will be looking at other indicators. The Challengers,the ADP numbers will give a sense of what's happening in thelabour market ... I am sort of hard pressed to see this turninto something major. We've seen it before. Both sides will actin time to avert a catastrophic outcome."
The dollar was down 0.1 percent against a basket ofcurrencies, not too far from a 7-1/2 month low touched onMonday.
JAPAN SALES TAX
The greenback was steady at 98.12 yen after rising toas much as 98.48 yen immediately after Japan's Prime MinisterShinzo Abe said he had decided to raise the sales tax as plannedfrom April 1 next year to 8 percent from the current 5 percentto reform public finances.
Japan's Nikkei share average rose 0.4 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan added 0.4 percent, pulling away from a two-weeklow after it slid 1.5 percent in the previous session. Regionaltrading activity was expected to be light with China and HongKong closed for National Day holiday.
China's manufacturing growth edged up only slightly lastmonth with the official Purchasing Managers' Index rising to51.1 from August's 51.0, but below expectations and adding toworries that its economy recovery has foundered.
In the commodity markets, gold ticked up 0.1 percentto about $1,328.6 an ounce after gaining 7.6 percent inJuly-September, reversing three straight quarters of decline.
Brent crude dipped 0.5 percent to around $107.8 abarrel after gaining 6 percent in the third quarter, also endinga three-quarter losing streak.
- Budget, Tax & Economy