* Aussie dollar shrugs off downbeat China data, soars after RBA stands pat
* Yen bounces back after downward blip, with sales tax hike to proceed as planned
* Euro firms but Italian politics remain a major risk
By Lisa Twaronite
TOKYO, Oct 1 (Reuters) - The dollar wobbled against a basket of major currencies and gave up its gains against the yen on Tuesday after the U.S. failed to reach a compromise ahead of the deadline for a looming government shutdown.
The yen bounced back after an earlier downward blip that came after Japan’s Prime Minister Shinzo Abe said he had decided to go ahead with a planned hike in the national sales tax, while the Australian dollar soared after that country’s central bank stood pat.
The U.S. government directed federal agencies to cut back services after lawmakers could not break a political stalemate that sparked new questions about the ability of a deeply divided Congress to perform its most basic functions.
The standoff came 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.
“I think the dollar’s reaction to the shutdown news wasn’t bigger because it’s still the middle of the night in America, so there was no immediate impact. We still need to watch developments from now,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
The dollar index skidded about 0.2 percent on the day to 80.105, holding above Monday’s low of 80.030, which was its lowest since February.
Against its Japanese counterpart, the dollar also slipped about 0.2 percent to 98.07 yen, moving back toward a one-month low of 97.48 yen hit on Monday, according to Reuters data.
The yen remained under pressure, with the Japanese government on track to raise the national sales tax to 8 percent in April from 5 percent as it tries to put its fiscal house in order.
To soften the impact of the tax, Abe will also announce later on Tuesday an economic stimulus package worth 5 trillion yen or more, according to a final draft seen by Reuters.
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.
Downbeat data from China also added to investors’ wariness. 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 Australian dollar shrugged off the Chinese data and soared after the Reserve Bank of Australia kept its cash rate at a record low of 2.5 percent, and offered little guidance on the chance of further cuts.
The Aussie jumped 0.8 percent to $0.9390, from $0.9338 before the RBA decision, moving away from Monday’s low of $0.9280.
The Aussie has rebounded by around 4 U.S. cents over the past month, partly in reaction to the Federal Reserve’s surprise decision to keep its asset buying programme intact.
“A lower level of the currency than seen at present would assist in rebalancing growth in the economy,” RBA Governor Glenn Stevens said on Tuesday.
The euro firmed 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 $1.3543 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 was steady at 132.89, holding well above a three-week trough of 131.33 yen plumbed on Monday.