FOREX-Dollar gains on hopes of deal on U.S. spending, debt ceiling


* Signs of progress in Washington debt negotiation easedefault fear

* Market still cautious as deal yet to be sealed

* The proposed deal may be seen as stop-gap measure

* Dollar near 2-week high vs yen

By Hideyuki Sano

TOKYO, Oct 15 (Reuters) - The dollar held firm on Tuesday,hitting a two-week high against the yen as top U.S. senatorssignalled they could soon reach a deal to reopen the U.S.government and avert a possible debt default for the time being.

The dollar changed hands at 98.64 yen, having erasedlosses since the start of week, staying near its highest levelin two weeks. It rose as high as 98.71 yen in early trade.

The dollar's index against a basket of currencies stood at80.367 , having bounced back from Monday's low of80.126 and keeping some distance from an eight-month low of79.627 hit earlier this month, just after the U.S. governmententered a partial shutdown.

The euro was little changed at $1.3550, well withinrecent trading band centering $1.35-1.36.

Senate Majority Leader Harry Reid said that he and hisRepublican counterpart, Mitch McConnell, have made strongprogress toward reaching a deal.

Hopes that a deal could be reached before Oct. 17, when theU.S. Treasury could technically be in default on its debts easedinvestors' fears.

Still, many uncertainties remain, given that any deal wouldhave to win approval in the House of Representatives, whereconservative Republicans pegged any continued government fundingto spending cuts.

The plan under discussion in the Senate is not particularlyinspiring to markets either, as it seeks only to raise the debtceiling through mid-February 2014 and to fund the governmentoperations to the middle of January.

"This is unlikely to lead to a sustainable rally in thedollar and shares. U.S. policy makers are just kicking the canand we will have another showdown in January. Under suchcircumstances, it would be difficult for the Fed to reduce itsstimulus," said Masafumi Yamamoto, forex strategist atPraevidentia Strategy.

Several Fed policymakers are due to speak later in the day,including Chairman Ben Bernanke, who will speak via prerecordedvideo at 0100 GMT.

Any hint that the Fed will delay tapering its bond buyingwould reduce U.S. interest rates and thereby the yield ondollars.

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