FOREX-Dollar edges up, but vulnerable as U.S. impasse continues


* Dollar pulls back from 2-month low versus yen

* U.S. budget impasse continues, but signs of hope emerge

* Still seen under pressure until a U.S. deal is reached

By Jessica Mortimer

LONDON, Oct 8 (Reuters) - The dollar edged higher onTuesday, pulling away from a two-month low against the yen assigns emerged that U.S. lawmakers could come to an agreement toavoid a default.

However, analysts said the U.S. currency would remain underbroad selling pressure while a U.S. budget standoff continuedand kept alive the possibility that Republicans and Democratsmay not agree on the debt ceiling before an Oct. 17 deadline.

On Monday, President Barack Obama said he would accept ashort-term increase in the nation's borrowing authority to avoiddefault. An influential senator was also said to be floating aplan to cut federal spending and reform the U.S. tax code aspart of a broader deal.

The dollar was up 0.4 percent at 97.10 yen, havingdropped to 96.55 yen, its lowest since Aug. 12. It thenrecovered to trade back above chart support at 96.73 yen, its200-day moving average.

"There are a few signs of willingness from the White Houseand Congress to open up to more constructive discussions, whichsupports the view that some kind of deal will be reached and hascalmed investors' fears," said Niels Christensen, currencystrategist at Nordea.

But he added: "The risk is to the downside for the dollar aslong as we don't have an agreement ... There may be some moreeuro buying if it goes above last week's high."

The euro was down 0.1 percent at $1.3568, pullingaway from an eight-month high of $1.3645 touched on Thursday.

The dollar index, which measures the U.S. currency'svalue against a basket of currencies, was up 0.1 percent at80.026. Last week it hit an eight-month low of 79.627.

China and Japan, the United States' biggest creditors, areincreasingly worried the U.S. government shutdown and standoffover the debt ceiling could wreak havoc on their trillions ofdollars of investments in U.S. Treasury bonds.

The impasse has distracted investors from what hadpreviously been their main preoccupation: the timing of the U.S.Federal Reserve's reduction of its stimulus, which should liftthe dollar.

"No one wants to be caught short if there's a suddenresolution of the fiscal impasse, so every time the dollar takestwo steps down, it tends to take one step back up," said aresearcher at a foreign exchange market research firm in Tokyo.

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