FOREX-Dollar off 8-mth low after manufacturing boost, budget row weighs
* Strong ISM data helps to lift dollar off 8-month low
* Dollar seen under pressure given US political deadlock
* Euro helped by hopes Italy's govt survive confidence motion
* Eyes on ECB as investors expect LTRO later this year
TOKYO, Oct 2 (Reuters) - Robust U.S. manufacturing data kept the dollar off eight-month lows against a basket of currencies, despite concerns over how long the partial U.S. government shutdown might last while lawmakers search for a compromise deal on the budget.
Some traders expect more market volatility ahead, with no signs in sight of an end to Washington's political deadlock, though markets appeared hopeful the shutdown would be short-lived.
"It's probably just calm before the storm. It seems like there will be no solution in the near-term," said a currency trader at a Western bank in Tokyo. "To me, the markets are becoming a bit complacent about it."
The dollar index, which sank to a near eight-month low of 79.864 on Tuesday on concerns about the shutdown, stood at 80.199, up slightly from later U.S. levels.
Helping the dollar recover was data on Tuesday that showed U.S. manufacturing activity expanded at its fastest pace in almost 2-1/2 years and that firms added the most workers in 15 months.
Yet many market players see a bumpy road ahead for the dollar, as negotiations between congressional Republicans and President Barack Obama over the budget and lifting the debt ceiling are expected to diffult and possibly prolonged.
"Because of the shutdown, the government is spending less and it may not run out of money by Oct 17. So this issue could possibly drag on for nearly a month. I expect the dollar to stay under pressure," said Minori Uchida, chief currency strategist at the Bank of Tokyo-Mitsubishi UFJ.
The government shutdown is complicating the picture for markets as it has disrupted the release of economic data at a time when markets are looking for clues to when the Federal Reserve will scale back its stimulus.
The U.S. Bureau of Labor Statistics, which was scheduled to publish the closely watched non-farm payrolls report on Friday, said it would not issue anything until government operations resumed.
Unsurprisingly, investors are reluctant to take big positions, and the thin trading led to volatility, as seen in the euro earlier.
The euro changed hands at $1.3523, virtually flat on the day, having hit an 8-month high of the previous day to breaking out of a range roughly between $1.3462 and $1.3569 that had held since Sept. 19.
The common currency drew support from hopes Italian Prime Minister Enrico Letta may survive a confidence vote later on Wednesday.
Senior party figures in Silvio Berlusconi's fractious centre-right movement urged Italian lawmakers to defy the billionaire media tycoon and back Letta, bringing Berlusconi's party closer to breaking apart.
Another key focus for the euro will be the European Central Bank's policy meeting on Wednesday, with analysts expecting the central bank to offer a ultra-cheap funds possibly by the year-end, though few expect it this week.
The dollar was also soft against the yen, slipping 0.2 percent to 97.79 yen.
Against the safe-haven Swiss franc, the dollar hit a near two-year low of 0.89925 franc on Tuesday and last stood at 0.9065.
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