* U.S. budget impasse saps incentive to buy dollars
* Japan corporate tax-cut hopes lead to yen-selling
* Dollar index firms but remains not far off a 7-mth trough
* Euro rises on yen, erases early gains against dollar
By Lisa Twaronite
TOKYO, Sept 26 (Reuters) - The dollar gained on the yen in Asia on Thursday on hopes of more corporate tax reform steps from Japan’s government, though the U.S. budget impasse kept the greenback shackled against other rivals.
Against the yen, the dollar rose as high as 99.12 yen on the EBS trading platform, and last bought 98.88 yen, up 0.5 percent and off a one-week low of 98.27 yen touched in the morning.
The euro added 0.4 percent to 133.70 after rising as high as 133.91 yen on EBS.
“Today’s move was not a sign of dollar strength, but rather a signal of yen weakness, and yen selling,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman,
“There was a Kyodo News headline this morning that Japan will urgently consider cutting the corporate tax rate, and while this was not new, and any change is unlikely to be implemented immediately, some took it as a fresh reason to sell yen,” he said.
The Japanese government plans to say it will “urgently consider” cutting the corporate tax rate when it compiles a stimulus package next week, Kyodo said, citing government sources.
A government source told Reuters last week that Japan will consider cutting corporate taxes and ending a temporary tax hike earlier than scheduled, as a means to cushion the economy from a scheduled sales tax increase.
Prime Minister Shinzo Abe is expected to decide around Oct. 1 to proceed with a planned sales tax increase to 8 percent from 5 percent beginning next April, in a bid to rein in Japan’s massive public debt. He recently instructed his cabinet to come up with measures to blunt the economic impact of the hike.
Murata added that the Japanese currency’s direction was largely determined by rate differentials between the U.S. and Japan, and that investors were warily watching developments in the U.S. budget situation.
Both the debt ceiling and government funding issues have been complicated by Republican attempts to use the must-do bills to gut President Barack Obama’s healthcare law. Congressional officials must reach a budget deal by Monday that would allow the government to keep running.
The dollar index rose 0.1 percent to 80.417, after slipping 0.3 percent on Wednesday toward a 7-month trough of 80.060 plumbed on Sept. 18. On that day, the U.S. Federal Reserve stunned markets by maintaining its massive stimulus programme when it had been widely expected to begin tapering its asset purchases.
The Fed opted to stand pat on policy partly because it acknowledged the potential headwinds from the looming U.S. political impasse over the budget. Central bankers also remained concerned about the strength of the U.S. recovery, and subsequent data has validated those concerns.
U.S. figures on Wednesday showed orders for long-lasting manufactured goods barely grew in August, while sales of new homes last month were near their lowest level of the year.
The final reading of U.S. second quarter gross domestic product is due later on Thursday, followed by the key non-farm payrolls report next week.
Stronger-than-expected data would likely reignite speculation that the Fed could announce a stimulus reduction in December, or even next month. This possibility will continue to support the U.S. currency, market participants said.
Investors are also wary of selling the dollar short against a backdrop of a U.S. political showdown, because the U.S. unit has rallied when past impasses were resolved.
The yen’s drop gave the dollar a cross-trading lift against the euro, which erased its earlier gains and edged down about 0.1 percent to $1.3518.
Data showing German consumer confidence at a six-year high supported the euro.