FOREX-Optimism on U.S. debt deal sees dollar rise vs yen, boosts risk


* Dollar rises vs yen on prospect of U.S. debt deal

* Republicans offer plan to extend Oct. 17 deadline

* Rising risk sentiment helps growth-linked currencies

By Anooja Debnath

LONDON, Oct 11 (Reuters) - The dollar traded near a two-weekpeak versus the yen on Friday while growth-linked currenciesoutperformed as signs of a breakthrough in the U.S. budgetimpasse lifted investors' appetite for risk.

Rates on U.S. bills maturing on Oct. 17 were off highs,pricing in a retreat in the chances of a historic debt defaultnext week while the stock volatility index fell as globalequities rose. That led investors to pare positions incurrencies like the yen and Swiss franc used as safe havens byinvestors in times of political and financial nerves.

Although there was no deal after a 90-minute meeting betweenPresident Barack Obama and Republican leaders, talks continuedinto the night in an effort to reopen the government and avert adefault.

Republicans offered to extend the government's borrowingauthority for several weeks, temporarily putting off a default,while Obama was pushing to also reopen government operationsthat have been closed since Oct. 1.

The dollar was up 0.2 percent at 98.32 yen, justbelow an intraday high of 98.56 yen that was the highest sinceOct. 1. Support was at the 200-day moving average of 96.89 yen.

Currencies like the Australian and the New Zealanddollar which tend to benefit when hopes for globalgrowth rise were up 0.2 percent at $0.9470 and 0.7 percent at$0.8334 respectively. The euro was also up 0.3 percent at$1.3555.

"Markets believe some kind of deal or postponement (of theOct. 17 default deadline) will ease the tension...we had a verystrong rally in equities and dollar/yen is higher and that is asignal there is a bit more risk appetite in the market," saidNiels Christensen, FX strategist at Nordea.

"There is still a lot of uncertainty and I don't expect anybig moves today in currencies."

The fiscal impasse has taken the spotlight off the FederalReserve. But there is a growing suspicion that the central bankwill have to wait to evaluate the impact of a virtual governmentshutdown that is now in its 10th day before starting to scaleback stimulus for the economy.

"If it was not already, it will be near impossible for theFed to commence tapering before year-end if only a six week debtextension is agreed," said Tom Levinson, FX strategist at ING,in a note to clients.

He said the dollar index would struggle to sustain a rallyto 81.00, the level it reached before the Fed shocked markets onSept. 18 by opting not to start trimming bond-buying.

The dollar index, which tracks the greenback againsta basket of major counterparts was down 0.1 percent at 80.386,having risen to as high as 80.595 on Thursday, its highest sinceSept. 26.

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