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FOREX-Elusive U.S. debt deal pushes dollar lower versus yen

* Signs of progress on U.S. fiscal talks, but no deal yet

* Yen climbs from Friday's near 2-wk low vs dollar

NEW YORK, Oct 14 (Reuters) - The dollar fell on Monday and

the yen gained from safe-haven demand as U.S. lawmakers

struggled to reach a deal before this week's debt default

deadline, stoking some concern the United States may actually


While negotiations in the U.S. Senate to bring the fiscal

crisis to an end showed signs of progress on Sunday, failure to

break the stalemate before Thursday, the deadline to raise the

debt ceiling, would leave the world's biggest economy unable to

pay its bills in the coming weeks.

"The U.S. dollar is generally lower as the U.S. budget and

debt ceiling impasse continues, and the U.S. government gets

closer to the date at which it will exhaust its ability to

borrow," said Nick Bennenbroek, head of currency strategy at

Wells Fargo Securities LLC in New York.

"Given the continued impasse, and with the debt ceiling

deadline of 17 October cited by U.S. Treasury Secretary (Jack)

Lew now just days away, the greenback is under pressure against

most G10 currencies."

The dollar slipped 0.4 percent to 98.17 yen, having

touched a low of about 98.05 yen earlier. The dollar retreated

from a near two-week high of 98.60 yen set on Friday.

The yen's liquidity makes it a relatively safe option during

times of uncertainty. Traders said bids for the U.S. dollar at

levels near 98.00 yen helped to limit the yen's rise.

The dollar was down 0.5 percent against the Swiss franc

at 0.9075 francs while the euro rose 0.3 percent

to $1.3580.

Investors may be wary of betting too heavily in one

direction, given the possibility of a last-minute deal which

could make the dollar rally, analysts said.

With currencies trading in tight ranges, volatility has

taken a hit. One-month euro/dollar volatility slipped on Monday,

near lows last seen in mid-September when the U.S. Federal

Reserve surprised markets by refraining from trimming its

stimulus, pushing vols to a six-year trough.

Some in the market were positioning for the political

gridlock to be broken just before the Oct. 17 deadline, said

Adam Myers, senior FX strategist at Credit Agricole in London.

"We think there might be a temporary extension (to the

government's borrowing authority) for two, three weeks and it

seems the market is coming around that view as well."

"The general view in the FX and bond markets is that neither

(political) party wants to be seen as not coming to any

agreement so a temporary one will be passed and that should see

a very small U.S. dollar relief rally and euro/dollar lower."

Market holidays in Japan and partial market closure in the

United States on Monday added to the subdued mood. Trading in

euro/dollar was the lowest since April 1, using

Reuters Dealing data, and May 6 for dollar/yen.

Lee Hardman, currency economist at BTMU in London said the

fiscal worries would support the U.S. Federal Reserve's decision

to maintain its stimulus.

"The more protracted negotiations are over the debt ceiling

and partial government shutdown, it increases the likelihood

that quantitative easing could remain in place for a longer

period of time," Hardman said.