FOREX-Dollar treads water, investors hopeful of U.S. debt deal

Reuters

* Dollar index off two highs hit overnight as Republicansoffer plan

* Yen pulls away from two-month high hit earlier this week

By Lisa Twaronite

TOKYO, Oct 11 (Reuters) - The dollar treaded water in earlyAsian trading on Friday, holding just below two-week highsagainst major currencies hit in the previous session on hopefulsignals of progress toward averting a possible U.S. debtdefault.

House leaders were huddled in House Speaker John Boehner'soffice after presenting their plan for a short-term hike in thedebt limit to avoid a potential default to President BarackObama.

The New York Times later reported Obama had rejected theplan, but Republican Paul Ryan told reporters Obama had neitheraccepted or rejected the proposal.

The confusion caused a brief wobble in the dollar'sprogress.

"Although it is unclear whether the deal will be accepted bythe White House and Senate Democrats given the strings attached,the biggest effect has been on market sentiment, with U.S.equity markets seeing the largest response," strategists atBarclays wrote in a report to clients.

The dollar index, which tracks the U.S. unit againsta basket of six major counterparts, was last at 80.472, up about0.1 percent.

It rose as high as 80.595 on Thursday, its highest sinceSept. 26, though it remained not far off an eight-month low of79.627 touched on Oct. 3.

The dollar was slightly up from late U.S. levels at 98.18yen, well off a two-month low of 96.55 yen plumbed onTuesday.

The euro was slightly higher at $1.3525.

Hopes raised by the Republican offer helped major U.S. stockindexes mark their biggest gains in more than nine months onThursday, leaving the S&P 500 less than 2 percent away from itsrecord closing high set three weeks ago.

The U.S. government was partially shut for a 10th day onThursday. The fiscal standoff has heightened fears that the U.S.debt ceiling will not be raised by the Oct. 17 deadline,triggering a default on some short-term U.S. debt.

Two U.S. Federal Reserve officials with differing views onthe central bank's policy agreed on Thursday that a U.S. debtdefault would have devastating effects.

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