FOREX-Dollar rises as Yellen tapped to be next Fed chief

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 next in focus

By Anooja Debnath

LONDON, Oct 9 (Reuters) - The dollar rose on Wednesday onmarket relief that President Barack Obama has tapped FederalReserve Vice Chairwoman Janet Yellen to head the U.S. centralbank, lending some certainty while the budget impasse ensues.

Although Yellen is known for her dovish stance, which shouldideally be dollar-negative, strategists said the decisionfuelled risk sentiment and helped the dollar gain, especiallyagainst safe-haven currencies 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.

The dollar index erased early losses thanks tothe weaker yen, and was up about 0.5 percent at 80.245, edgingaway from the 79.627 trough hit last Thursday, a low not seensince early February.

Against the yen, the dollar rose about 0.5 percent on theday to 97.30 yen, moving away from a two-month low of96.55 touched on Tuesday. The dollar was up 0.5 percent againstthe Swiss franc at 0.9084 francs.

The euro was down 0.3 percent at $1.3527.

"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."

Ayako Sera, market economist at Sumitomo Mitsui Trust Bankshared a similar view. "It might be counterintuitive that thedollar rose on news that a dove is likely to be the next head ofthe Fed, but the news itself removed some of the uncertainty,and therefore contributed to risk-on sentiment."

Strategists were, however, sceptical that the risk-on moodwould last long, in light of the stand-off in Washington whereObama said he would be willing to negotiate on budget issuesonly after House Republicans agree to reopen the federalgovernment and raise the debt limit with no conditions.

Concerns are rising that a resolution might not be reachedby the Oct. 17 deadline when Congress must decide whether toraise the government's borrowing limit or the U.S. faces a debtdefault.

"I wouldn't expect this rally in risk to be too sustainablegiven much bigger issues at play including the U.S. governmentshutdown. The Oct. 17 initial deadline looms large as well,"said Sue Trinh, senior currency strategist at RBC in Hong Kong.

The uncertainty is likely to leave investors reluctant totake on big positions, and keep currencies in tight ranges.

While there is no sense of panic in financial markets yet,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.

The current budget impasse and growing danger of the U.S.economy slipping back into recession appeared to validate theFed's decision to remain cautious and probably even delay itsplans to trim its stimulus which is dollar negative.

Investors will also be keeping an eye on minutes of theFederal Reserve's September meeting, when the central bankcaught markets off guard by maintaining its bond-buying stimulusprogramme. The minutes are due out at 1800 GMT.

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