FOREX-Dollar higher against yen on U.S. debt deal prospects

* Dollar/yen trades near two-week high

* Markets expect last-minute U.S. debt deal

* Senate aides say agreement near, details still unclear

By Anooja Debnath

LONDON, Oct 16 (Reuters) - The dollar rose against the yen

on Wednesday on renewed assurances from U.S. lawmakers that a

deal to avert a U.S. default and reopen the partially-shut

government was within reach.

Officials said an agreement to lift the government's $16.7

trillion borrowing limit was near late on Tuesday after two

separate legislative efforts in the House were buried by

Republican rebellions, fraying market nerves.

The assurances, however, helped the dollar trade close to a

two-week high against the safe-haven yen and a four-week high

against a basket of currencies.

"Everyone is quite confident there will be an agreement in

the last minute if not before," said Niels Christensen, FX

strategist at Nordea. "If they reach a deal it will help risk

appetite, so we might see a move higher in dollar/yen," he said,

adding that the pair could target the 100 mark on a deal.


By 1000 GMT, the dollar was up 0.2 percent at 98.35 yen

, not far from the Oct. 1 high of 98.73. It was

down 0.1 percent against major currencies at 80.418, but still

close to the previous session's peak of 80.703, its highest

since Sept 18.

The dollar had taken a hit from Fitch Ratings' warning that

it could cut the U.S. sovereign rating from AAA, citing the

political spat over the debt ceiling.

The euro was up 0.1 percent against the dollar at

$1.3534, having hit a low of $1.3479 in the previous session,

which was a two-week trough.

Analysts said the prolonged debt debate would probably delay

the U.S. Federal Reserve's move to begin trimming its

bond-buying programme of stimulus for the economy.

"By now we have had two weeks of a (partial) government

shutdown and that is certainly going to have an impact on the

economy and will affect monetary policy," said Thu Lan Nguyen,

currency strategist at Commerzbank.

"Until now our base case was that the Fed would taper in

December but if we continue with the government shutdown the

chances are increasing that tapering is postponed to some time

in the first half of 2014."

If Congress fails to reach a deal by Thursday, cheques would

likely go out on time for a short while for everyone from

bondholders to workers who are owed unemployment benefits. But

analysts warn that a default on government obligations could

quickly follow, potentially causing the U.S. financial sector to

freeze up and threatening the global economy.

Kathy Lien, managing director at BK Asset Management, said

in a note to clients that she did not expect the dollar to drop

another 5 or 10 percent even if the Oct. 17 deadline passed

without a deal.

"If Congress manages to pass a bill to raise the debt

ceiling and reopen the government by Monday, it would still be

enough time to avoid a default," she said, as the U.S. won't

miss its first bond payment exactly on Oct. 17.

Until the statutory borrowing limit is actually increased,

investors are seen shunning Treasury bills maturing in the

latter half of October because of the possibility of a technical

default.