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FOREX-Dollar edges up, but vulnerable as U.S. impasse continues

* Dollar pulls back from 2-month low versus yen

* U.S. budget impasse continues, but signs of hope emerge

* Still seen under pressure until a U.S. deal is reached

By Jessica Mortimer

LONDON, Oct 8 (Reuters) - The dollar edged higher on Tuesday, pulling away from a two-month low against the yen as signs emerged that U.S. lawmakers could come to an agreement to avoid a default.

However, analysts said the U.S. currency would remain under broad selling pressure while a U.S. budget standoff continued and kept alive the possibility that Republicans and Democrats may not agree on the debt ceiling before an Oct. 17 deadline.

On Monday, President Barack Obama said he would accept a short-term increase in the nation's borrowing authority to avoid default. An influential senator was also said to be floating a plan to cut federal spending and reform the U.S. tax code as part of a broader deal.

The dollar was up 0.4 percent at 97.10 yen, having dropped to 96.55 yen, its lowest since Aug. 12. It then recovered to trade back above chart support at 96.73 yen, its 200-day moving average.

"There are a few signs of willingness from the White House and Congress to open up to more constructive discussions, which supports the view that some kind of deal will be reached and has calmed investors' fears," said Niels Christensen, currency strategist at Nordea.

But he added: "The risk is to the downside for the dollar as long as we don't have an agreement ... There may be some more euro buying if it goes above last week's high."

The euro was down 0.1 percent at $1.3568, pulling away from an eight-month high of $1.3645 touched on Thursday.

The dollar index, which measures the U.S. currency's value against a basket of currencies, was up 0.1 percent at 80.026. Last week it hit an eight-month low of 79.627.

China and Japan, the United States' biggest creditors, are increasingly worried the U.S. government shutdown and standoff over the debt ceiling could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.

The impasse has distracted investors from what had previously been their main preoccupation: the timing of the U.S. Federal Reserve's reduction of its stimulus, which should lift the dollar.

"No one wants to be caught short if there's a sudden resolution of the fiscal impasse, so every time the dollar takes two steps down, it tends to take one step back up," said a researcher at a foreign exchange market research firm in Tokyo.