FOREX-Dollar rises as Yellen likely to head Fed; focus on minutes

Reuters

* Dollar gains on news that Obama to choose Yellen for topFed job

* Dollar index rises, inches away from 8-month low

* Gains could be fleeting as no resolution yet to budgettalks

* Minutes of Fed's Sept policy meeting at 1800 GMT

By Anooja Debnath

LONDON, Oct 9 (Reuters) - The dollar rose on Wednesday onnews that President Barack Obama has tapped Federal Reserve ViceChairwoman Janet Yellen to head the U.S. central bank, whichlent some relief to markets still nervous about the budgetdeadlock.

Analysts said that chances of a partial resolution to theongoing crisis also caused investors to refrain from bettingaggressively on dollar weakness.

The dollar index erased early losses and wasup about 0.5 percent at 80.245, edging away from the 79.627trough hit last Thursday, a low not seen since early February.

Jane Foley, senior currency strategist at Rabobank saidwhile the Yellen news lent dollar support, markets were alsowary that an eleventh-hour deal could drive dollar higher andthus, no one wanted to be too short the currency.

Obama has said he would be willing to negotiate on budgetissues if House Republicans agree to reopen the federalgovernment and raise the debt limit with no conditions.

"The Yellen news has cleared the air a bit. I think it isalso just people not wanting to be on the wrong side of anydollar rally," Foley said. "There are expectations that as soonas there is deal in Washington there will be a relief rally inthe dollar so people don't want to be too short of the dollar "

Concerns lingered, however, that a resolution might not bereached by the Oct. 17 deadline when Congress must decidewhether to raise the government's borrowing limit or the U.S.faces a debt default.

Signs of unease have started to emerge, such as investors'waning appetite for U.S. Treasury bills which caused yields torise to five-year highs. Some markets players said this couldhave lent the dollar marginal support.

The current budget impasse and its effect on the economyappeared to validate the Fed's decision to remain cautious andprobably even delay plans to trim its stimulus.

Traders said markets did not want to make any aggressivebets ahead of the Federal Reserve's September meeting minutesdue at 1800 GMT.

Although Yellen is known for her dovish stance, which shouldideally be dollar-negative, the decision fuelled risk sentimentand helped the dollar gain, especially against safe-havencurrencies like the yen and the Swiss franc.

Obama will announce his selection of Yellen later onWednesday. If confirmed by the U.S. Senate, Yellen would replaceBen Bernanke, whose term ends on Jan. 31.

Against the yen, the dollar rose about 0.4 percent on theday to 97.24 yen, moving away from a two-month low of96.55 touched on Tuesday. The dollar was up 0.7 percent againstthe Swiss franc at 0.9102 francs.

The euro was down 0.4 percent at $1.3512.

"In the past when Yellen's nomination got more likely, wesaw dollar weakness and suddenly we are seeing dollar strength,"said Ulrich Leuchtmann, head of FX research at Commerzbank.

"My interpretation is that we are at the moment in the phasewhere we might get into very deep trouble with the U.S. budgetcrisis and if that is the case, it would be good to have a Fedwhich would be very reactive and this is good for the dollar."

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