* Dollar rises vs yen on prospect of U.S. debt deal
* Republicans offer plan to stave off default threat
* Dollar index on pace for 0.3 percent rise this week
By Wanfeng Zhou
NEW YORK, Oct 11 (Reuters) - The dollar edged lower against
a basket of major currencies on Friday but was headed for its
first weekly gain in five, as optimism grew Washington may soon
clinch a stop-gap deal to avert a devastating U.S. default.
President Barack Obama and Republican leaders appeared ready
to end a political crisis that has shuttered the U.S. government
and pushed the country dangerously close to default after
meeting at the White House on Thursday. One senior Republican
said an agreement could come on Friday.
But uncertainty remained as the likelihood of no deal until
the Oct. 17 deadline is still high, analysts said, which could
pressure the dollar and help safe-haven currencies such as the
yen. Worries about the U.S. budget and debt crisis had driven
the dollar to an eight-month low last Thursday.
"A short-term deal would keep the level of uncertainty
relatively high and likely keep consumers' and business
sentiment pressured," said Omer Esiner, chief market analyst at
Commonwealth Foreign Exchange in Washington D.C.
"The ongoing fiscal drag would in-turn, likely keep the
Federal Reserve from scaling back its monetary easing further
The dollar index, which tracks the greenback against
a basket of six major currencies, slipped 0.1 percent to 80.329.
It's on pace for a gain of 0.3 percent this week, the first
weekly rise since early September.
The dollar rose 0.1 percent to 98.27 yen, having hit
a session peak of 98.55 yen, according to Reuters data, the
highest since Oct. 1. Support is seen at the 200-day moving
average of 96.87 yen.
The euro rose 0.3 percent to $1.3557.
Paul Bednarczyk, head of research at 4CAST said markets were
hoping for a deal before the end of the weekend.
"If we get a deal that is more than just can-kicking, then
equities will go up and dollar/yen will go up with it. There is
a very reliable correlation at the moment and nobody is going to
fight it," he said, adding that the dollar could target 100 yen.
High-yielding, growth-sensitive currencies rose. The New
Zealand dollar gained 0.6 percent to $0.8323. The
Australian dollar also rose slightly to $0.9454.
The fiscal impasse has taken the spotlight off the Federal
Reserve. But expectations are growing the central bank will have
to evaluate the impact of a government shutdown, entering its
11th day, before starting to scale back its stimulus.
A survey showed Friday U.S. consumer sentiment deteriorated
in October to its weakest level in nine months as the first
federal government shutdown in 17 years undermined Americans'
outlook on the economy. The dollar showed little
reaction to the data.
"If it was not already, it will be near impossible for the
Fed to commence tapering before year-end if only a six-week debt
extension is agreed," said Tom Levinson, FX strategist at ING,
in a note to clients.
He said the dollar index would struggle to sustain a rally
to 81.00, the level it reached before the Fed surprised markets
on Sept. 18 by opting not to start trimming its bond buying.