FOREX-Dollar firms vs yen on hopes for U.S. debt deal


* Senate won't announce U.S. fiscal deal on Tuesday - aides

* Dollar/yen slightly pares gains but reaction limited

* Market still expects deal to be reached - trader

* Even if deadline passes, deal by Monday could avoiddefault-strategist

By Masayuki Kitano and Lisa Twaronite

SINGAPORE/TOKYO, Oct 16 (Reuters) - The dollar rose againstthe yen in Asia on Wednesday, supported by hopes that U.S.lawmakers may soon clinch a deal to raise the government'sborrowing limit and avert the risk of a U.S. default.

Optimism had grown earlier, after a Senate aide said Senateleaders could announce a deal late on Tuesday to extend thegovernment's borrowing authority until Feb. 7 and quicklyre-open federal agencies that have been closed since Oct. 1.

Senate aides later said that such a deal was not expected tobe announced on Tuesday, but added that Senate leaders werecontinuing to negotiate.

While the dollar briefly pared its gains against the yen onthe news that a deal was not expected on Tuesday, that reactionproved short-lived and the greenback managed to hold firm.

"What lies at the very root is optimism," said a trader fora Japanese bank in Singapore. "There is a strong expectationthat a deal will be reached in the end, that a default will beavoided," he added.

Hopes for a deal helped bolster the dollar, which had takena hit earlier after Fitch Ratings warned on Tuesday that itcould cut the U.S. sovereign rating from AAA, citing thepolitical spat over the debt ceiling.

The dollar rose 0.4 percent on the day to 98.55 yen.The dollar had dropped to as low as 97.99 yen on Tuesday ontrading platform EBS, in the wake of Fitch's warning.

The greenback might rise further against the yen in the nearterm if a deal to raise the debt ceiling is actually reached,said Callum Henderson, Singapore-based global head of FXresearch for Standard Chartered Bank.

"I would think that the short-term reaction would be(dollar) positive, that investors would sell the yen, sell othersafe havens such as the Swiss franc and buy back dollar shortpositions that have been put on ahead of such a deal," Hendersonsaid.

"Thereafter people would say, well hang on a minute, maybeU.S. growth will be hurt in the fourth quarter by what's beengoing on for the past few days and weeks, so you may get somedegree of reassessment," he added.

The market has been growing nervous ahead of a deadline onThursday, when the U.S. Treasury says the government will reachits borrowing limit.

Against the Swiss franc, the dollar edged up 0.2 percent to0.9144.

The dollar index, which measures the greenback'svalue against a basket of currencies, firmed 0.l percent to 80.539 after climbing as high as 80.703 on Tuesday, its highestsince Sept. 18.

The euro eased 0.1 percent to $1.3515.

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."

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