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FOREX-Dollar rises as Yellen tapped to be next Fed chief

* 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 next in focus

By Anooja Debnath

LONDON, Oct 9 (Reuters) - The dollar rose on Wednesday on market relief that President Barack Obama has tapped Federal Reserve Vice Chairwoman Janet Yellen to head the U.S. central bank, lending some certainty while the budget impasse ensues.

Although Yellen is known for her dovish stance, which should ideally be dollar-negative, strategists said 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.

The dollar index erased early losses thanks to the weaker yen, 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.

Against the yen, the dollar rose about 0.5 percent on the day to 97.30 yen, moving away from a two-month low of 96.55 touched on Tuesday. The dollar was up 0.5 percent against the Swiss franc at 0.9084 francs.

The euro was down 0.3 percent at $1.3527.

"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."

Ayako Sera, market economist at Sumitomo Mitsui Trust Bank shared a similar view. "It might be counterintuitive that the dollar rose on news that a dove is likely to be the next head of the Fed, but the news itself removed some of the uncertainty, and therefore contributed to risk-on sentiment."

Strategists were, however, sceptical that the risk-on mood would last long, in light of the stand-off in Washington where Obama said he would be willing to negotiate on budget issues only after House Republicans agree to reopen the federal government and raise the debt limit with no conditions.

Concerns are rising 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.

"I wouldn't expect this rally in risk to be too sustainable given much bigger issues at play including the U.S. government shutdown. The Oct. 17 initial deadline looms large as well," said Sue Trinh, senior currency strategist at RBC in Hong Kong.

The uncertainty is likely to leave investors reluctant to take on big positions, and keep currencies in tight ranges.

While there is no sense of panic in financial markets yet, 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.

The current budget impasse and growing danger of the U.S. economy slipping back into recession appeared to validate the Fed's decision to remain cautious and probably even delay its plans to trim its stimulus which is dollar negative.

Investors will also be keeping an eye on minutes of the Federal Reserve's September meeting, when the central bank caught markets off guard by maintaining its bond-buying stimulus programme. The minutes are due out at 1800 GMT.