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

Reuters

* Dollar/yen trades near two-week high

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

* Senate aides say agreement near, details still unclear

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

on Wednesday but fell against most other major currencies 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 of Representatives

were buried by Republican rebellions, fraying market nerves.

The assurances helped stoked some risk tolerance and pushed

the dollar to a near a two-week high against the safe-haven yen

even as it fell against the euro, sterling and the Australian

dollar.

"The markets appear nonplussed for the time being as

'headline fatigue' has clearly crept in and perhaps the greatest

surprise to any US budget deal may simply be a tepid reaction by

the market as most of the news appears to be priced in," said

Boris Schlossberg, managing director of FX Strategy at BK Asset

Management in New York.

In early New York trade, the dollar was up 0.3 percent at

98.42 yen, not far from the Oct. 1 high of 98.72. It

was down 0.2 percent against major currencies at 80.307,

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.

"Everyone is quite confident there will be an agreement in

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

strategist at Nordea in London. "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.

The euro was up 0.3 percent against the dollar at

$1.3563, having hit a low of $1.3478 in the previous session,

which was a two-week trough.

The British pound gained 0.2 percent against the dollar to

$1.6029 while the Australian dollar rose 0.1 percent to

US$0.9532.

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.

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.

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