* Dollar gains on yen as hopes remain alive of deal beforeThursday
* Even if deadline passes, deal by Monday could avoiddefault-strategist
By Lisa Twaronite
TOKYO, Oct 16 (Reuters) - The dollar rose against the yen inearly Asian trade on Wednesday, after a U.S. Senate source saida deal to extend the U.S. debt limit could be reached withinhours.
The Senate deal would fund the U.S. government through Jan.15 and create a deficit-reduction panel, a source told Reuters.
The dollar was up about 0.4 percent against the yen at 98.50yen (JPY= ) moving away from an intraday low of 98.07 yen hit onTuesday in the wake of Fitch's announcement that it had put theU.S. rating on credit watch. The dollar moved back toward atwo-week high of 98.72 yen touched in the previous session.
Hopes were put on ice late on Tuesday, as the Republican-ledU.S. House of Representatives has failed so far to produce aplan to avert a government default even as Thursday's deadlineloomed large. It abandoned plans to vote on any measure onTuesday.
President Barack Obama will meet with Treasury SecretaryJacob Lew on Wednesday, the White House said late on Tuesday.
The greenback skidded to its session lows on Tuesday afterFitch Ratings warned that it could cut its sovereign creditrating of the United States from AAA, citing the politicalimpasse over raising the debt ceiling.
The dollar index was slightly higher at 80.494 afterclimbing as high as 80.703 on Tuesday, its highest since Sept.18.
Kathy Lien, managing director at BK Asset Management, saidin a note to clients that she did not expect the dollar to dropanother 5 or 10 percent even if the Oct. 17 deadline passedwithout a deal.
"If Congress manages to pass a bill to raise the debtceiling and reopen the government by Monday, it would still beenough time to avoid a default," she said, as the U.S. won'tmiss its first bond payment exactly on Oct. 17.
Until the $16.7 trillion statutory borrowing limit isactually increased, investors are seen shunning Treasury billsmaturing in the latter half of October because of thepossibility of a "technical default."
The U.S. Treasury's weekly auctions of three- and six-monthbills drew below-average demand as investors feared a delayed ormissed coupon payment. The value of bids received for the salesover those accepted was the lowest since 2009.
The euro was nearly flat from U.S. levels at $1.3524,recovering from a two-week low of $1.3478 hit early on Tuesday.