* Dollar index still in sight of 8-month lows
* Investors show little conviction, currencies trapped in tight ranges
* No resolution yet to U.S. budget talks, debt ceiling risk looms
* FOMC minutes next in focus
By Ian Chua
SYDNEY, Oct 9 (Reuters) - The U.S. dollar languished near a two-month low against the yen in Asia on Wednesday and stayed close to a recent eight-month trough on a currency basket with investors growing anxious as the U.S. budget impasse dragged on.
Hopes are fast fading that a resolution will be reached before the mid-October deadline when Congress must decide whether to raise the government's borrowing limit or face the risk of an historic debt default.
Given the uncertainty, investors are loathed to take big positions, keeping the major currencies in a tight range.
The dollar index last traded at 79.929, having held steady on Tuesday. However, it remained near last Thursday's trough of 79.627, a low not seen since early February.
Against the yen, the greenback fetched 96.87 not far from an eight-week low of 96.55 plumbed on Tuesday. Immediate support is seen around 96.78, the 200-day moving average. The euro bought $1.3591, having dipped 0.1 percent overnight.
"It seems increasingly likely that the impasse in Washington is going to persist up to or even beyond the October 17 soft deadline for raising the debt ceiling, implying near-term risks to the downside for the USD," analysts at BNP Paribas wrote in a client note.
"We think USD/JPY is particularly vulnerable in light of stretched short yen positioning and the yen's structural tendency to perform well in periods of elevated risk aversion and market stress."
While there is no major panic in financial markets yet, an increasing sense of desperation is starting to emerge in some areas, such as the U.S. Treasury bill market.
Normally an uneventful event, the sale of one-month bills on Tuesday turned into a near-boycott with investors demanding the highest yields in five years as fears intensified over a possible default.
Traders expect the dollar to underperform safe-haven currencies like the yen and Swiss franc in the event of a U.S. default, but suspect emerging market currencies will be hit even harder.
A senior U.S. Treasury official called on Congress to re-open the government and raise the debt ceiling or risk hurting the United States' international reputation as a safe haven and stable financial center.
The IMF chief economist warned a failure to lift the debt ceiling would lead to dramatic cuts in government spending and "probably ... a lot of financial turmoil."
So far, there is no sign of a breakthrough in Washington. President Barack Obama said he would be willing to negotiate on budget issues only after House Republicans agree to re-open the federal government and raise the debt limit with no conditions.
House Republicans said they would insist on deficit-reduction talks with Obama as a condition for raising the federal debt limit.
Investors will also be keeping an eye on minutes of the Federal Reserve's September meeting, when the central bank caught markets offguard by maintaining its bond-buying stimulus programme.
Given the current budget impasse and growing danger of the U.S. economy slipping back into recession, it would seem the Fed had acted with impressive foresight at the Sept. 17-18 meeting.