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FOREX-Dollar rises as Yellen likely to head Fed; focus on minutes

* Dollar gains on news that Obama to choose Yellen for top Fed job

* Dollar index rises, inches away from 8-month low

* Gains could be fleeting as no resolution yet to budget talks

* Minutes of Fed's Sept policy meeting at 1800 GMT

By Anooja Debnath

LONDON, Oct 9 (Reuters) - The dollar rose on Wednesday on news that President Barack Obama has tapped Federal Reserve Vice Chairwoman Janet Yellen to head the U.S. central bank, which lent some relief to markets still nervous about the budget deadlock.

Analysts said that chances of a partial resolution to the ongoing crisis also caused investors to refrain from betting aggressively on dollar weakness.

The dollar index erased early losses and was up about 0.5 percent at 80.245, edging away from the 79.627 trough hit last Thursday, a low not seen since early February.

Jane Foley, senior currency strategist at Rabobank said while the Yellen news lent dollar support, markets were also wary that an eleventh-hour deal could drive dollar higher and thus, no one wanted to be too short the currency.

Obama has said he would be willing to negotiate on budget issues if House Republicans agree to reopen the federal government and raise the debt limit with no conditions.

"The Yellen news has cleared the air a bit. I think it is also just people not wanting to be on the wrong side of any dollar rally," Foley said. "There are expectations that as soon as there is deal in Washington there will be a relief rally in the dollar so people don't want to be too short of the dollar "

Concerns lingered, however, that a resolution might not be reached by the Oct. 17 deadline when Congress must decide whether to raise the government's borrowing limit or the U.S. faces a debt default.

Signs of unease have started to emerge, such as investors' waning appetite for U.S. Treasury bills which caused yields to rise to five-year highs. Some markets players said this could have lent the dollar marginal support.

The current budget impasse and its effect on the economy appeared to validate the Fed's decision to remain cautious and probably even delay plans to trim its stimulus.

Traders said markets did not want to make any aggressive bets ahead of the Federal Reserve's September meeting minutes due at 1800 GMT.

Although Yellen is known for her dovish stance, which should ideally be dollar-negative, the decision fuelled risk sentiment and helped the dollar gain, especially against safe-haven currencies like the yen and the Swiss franc.

Obama will announce his selection of Yellen later on Wednesday. If confirmed by the U.S. Senate, Yellen would replace Ben Bernanke, whose term ends on Jan. 31.

Against the yen, the dollar rose about 0.4 percent on the day to 97.24 yen, moving away from a two-month low of 96.55 touched on Tuesday. The dollar was up 0.7 percent against the Swiss franc at 0.9102 francs.

The euro was down 0.4 percent at $1.3512.

"In the past when Yellen's nomination got more likely, we saw dollar weakness and suddenly we are seeing dollar strength," said Ulrich Leuchtmann, head of FX research at Commerzbank.

"My interpretation is that we are at the moment in the phase where we might get into very deep trouble with the U.S. budget crisis and if that is the case, it would be good to have a Fed which would be very reactive and this is good for the dollar."