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FOREX-Dollar firms vs yen on hopes for U.S. debt deal

* Senate won't announce U.S. fiscal deal on Tuesday - aides

* Dollar/yen slightly pares gains but reaction limited

* Market still expects deal to be reached - trader

* Even if deadline passes, deal by Monday could avoid default-strategist

By Masayuki Kitano and Lisa Twaronite

SINGAPORE/TOKYO, Oct 16 (Reuters) - The dollar rose against the yen in Asia on Wednesday, supported by hopes that U.S. lawmakers may soon clinch a deal to raise the government's borrowing limit and avert the risk of a U.S. default.

Optimism had grown earlier, after a Senate aide said Senate leaders could announce a deal late on Tuesday to extend the government's borrowing authority until Feb. 7 and quickly re-open federal agencies that have been closed since Oct. 1.

Senate aides later said that such a deal was not expected to be announced on Tuesday, but added that Senate leaders were continuing to negotiate.

While the dollar briefly pared its gains against the yen on the news that a deal was not expected on Tuesday, that reaction proved short-lived and the greenback managed to hold firm.

"What lies at the very root is optimism," said a trader for a Japanese bank in Singapore. "There is a strong expectation that a deal will be reached in the end, that a default will be avoided," he added.

Hopes for a deal helped bolster the dollar, which had taken a hit earlier after Fitch Ratings warned on Tuesday that it could cut the U.S. sovereign rating from AAA, citing the political spat over the debt ceiling.

The dollar rose 0.4 percent on the day to 98.55 yen. The dollar had dropped to as low as 97.99 yen on Tuesday on trading platform EBS, in the wake of Fitch's warning.

The greenback might rise further against the yen in the near term if a deal to raise the debt ceiling is actually reached, said Callum Henderson, Singapore-based global head of FX research for Standard Chartered Bank.

"I would think that the short-term reaction would be (dollar) positive, that investors would sell the yen, sell other safe havens such as the Swiss franc and buy back dollar short positions that have been put on ahead of such a deal," Henderson said.

"Thereafter people would say, well hang on a minute, maybe U.S. growth will be hurt in the fourth quarter by what's been going on for the past few days and weeks, so you may get some degree of reassessment," he added.

The market has been growing nervous ahead of a deadline on Thursday, when the U.S. Treasury says the government will reach its borrowing limit.

Against the Swiss franc, the dollar edged up 0.2 percent to 0.9144.

The dollar index, which measures the greenback's value against a basket of currencies, firmed 0.l percent to 80.539 after climbing as high as 80.703 on Tuesday, its highest since Sept. 18.

The euro eased 0.1 percent to $1.3515.

Kathy Lien, managing director at BK Asset Management, said in a note to clients that she did not expect the dollar to drop another 5 or 10 percent even if the Oct. 17 deadline passed without a deal.

"If Congress manages to pass a bill to raise the debt ceiling and reopen the government by Monday, it would still be enough time to avoid a default," she said, as the U.S. won't miss its first bond payment exactly on Oct. 17.

Until the $16.7 trillion statutory borrowing limit is actually increased, investors are seen shunning Treasury bills maturing in the latter half of October because of the possibility of a "technical default."