FOREX-Dollar index at 2-week high on hopes of U.S. breakthrough

Reuters

* Dollar rises broadly, euro and yen all push lower

* Fed minutes shows most board members still expect tapering

* Dollar still vulnerable if no resolution found

By Anirban Nag

LONDON, Oct 10 (Reuters) - The dollar rose on Thursday,trading at its highest in two weeks against a basket ofcurrencies on signs Washington was moving towards breaking astalemate over debt and averting a possible U.S. default.

A rise in U.S. 10-year Treasury yields to 2.70percent from 2.60 percent just a week ago was also helping. Thedollar index rose to 80.537, extending its recovery froman eight-month low of 79.627 hit a week ago.

The euro was down 0.15 percent at $1.3506, extendinglosses into a third session.

The U.S. currency received an additional boost after theminutes of the Federal Reserve's September meeting revealed thedecision not to slow stimulus was a "close call" and that mostboard members supported tapering bond-buying later this year.

While the latest fiscal problems are likely to see thoseexpectations of tapering fade, the minutes nonetheless offeredbroad support to the dollar.

"There have been some positive developments regarding thedebt ceiling and while they may be short-term measures, theyoffer some relief to the dollar," said Neil Mellor, currencystrategist at Bank of New York Mellon.

"The Fed minutes are also talking about tapering later thisyear, all of which is nudging markets to cover positions beforethe weekend."

House Republican leaders will visit the White House onThursday as the search for a way to break the impasse continues.

Some Republicans and Democrats floated the possibility of ashort-term increase in the debt limit to allow time for broadernegotiations on the budget.

"There are hopes that Washington is moving on the deadlockover the government shutdown and debt ceiling. The dollar looksset to gain if these problems are solved," said Sho Aoyama,senior market analyst at Mizuho Securities.

Against the yen, the dollar rose 0.4 percent to97.65, up from a two-month low of 96.55 yen hit on Tuesday.

One trigger for investor buying was the dollar's successstaying above its 200-day moving average in the past few days.The average stood at 96.83 on Thursday.

Despite signs of rapprochement in Washington, the dollarcould still be vulnerable to concerns about a debt default.Short-term U.S. government bill yields were at the highest levelsince the 2008 financial crisis, reflecting investor anxiety.

Many investors are now looking to U.S. Treasury SecretaryJack Lew's testimony before the Senate Finance Committee lateron Thursday on his latest estimate on the Treasury's fundingpositions, as well as possible contingency plans.

Lew has said the Treasury will run out of additionalborrowing authority on Oct. 17.

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