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Dollar bounces from eight-month low; Obama, Congress look for way out

By Dominic Lau

TOKYO (Reuters) - The dollar pulled further away from an eight-month low on Thursday on hopes of a break in the U.S. fiscal standoff, with President Barack Obama meeting Republican and Democrat lawmakers to discuss the government shutdown and raising the borrowing limit.

Asian shares were also expected to get some relief, while U.S. Standard & Poor's 500 E-mini futures added 0.3 percent, indicating a firmer open on Wall Street on Thursday after the S&P 500 index edged up 0.1 percent overnight.

House Democrats will journey to the White House later on Wednesday, and House Republican leaders will make the visit on Thursday as the search intensifies for a way to break the impasse that has worried markets and sparked warnings about the potential for economic havoc.

Some Republicans and Democrats also floated the possibility of a short-term increase in the debt limit to allow time for broader negotiations on the budget.

Financial markets have been optimistic that a deal between the two sides would be reached by the October 17 deadline to avoid an historic U.S. debt default.

But strains in short-term interest rates and funding markets increased as the date drew ever closer, keeping investors on edge.

"We think a resolution to the debt ceiling impasse in increasingly likely to be a last minute affair, and market anxiety seems likely to build up as we head into next week. We expect to see dollar/yen test lower in the days ahead," analysts at BNP Paribas wrote in a note.

The dollar held steady at 97.465 yen after gaining 0.5 percent in the previous session, its best one-day percentage rise in two weeks. It hit a five-week low against the Japanese currency on Tuesday.

The minutes of the Federal Reserve's September meeting revealing the decision not to reduce its $85 billion (53.2 billion pounds) a month bond-buying programme was a "close call" also helped buoy the U.S. currency.

"This is consistent with our expectations that the Fed will taper purchases at the upcoming December meeting. That said, the ongoing federal government shutdown and upcoming expiration of the debt ceiling suggests that the decision to taper could be pushed into 2014," Barclays Capital said in a note.

"A sooner resolution to the fiscal risks that cloud the outlook could keep December on the table, but a longer stalemate could dampen growth sufficiently and lead to a tapering in the first quarter of 2014 or later," it added.

Against a basket of major currencies, the dollar climbed further away from an eight-month low.

As the dollar regained some of its footing, gold dipped 0.1 percent to around $1,305.7 an ounce, adding to Wednesday's 0.9 percent decline.

U.S. crude prices eased 0.2 percent to about $101.5 a barrel, extending a 1.9 percent tumble in the previous session as the largest weekly build-up of U.S. stocks in a year weighed further on a market already concerned that Washington's budget standoff would curb demand in the world's biggest oil consumer.

(Editing by Shri Navaratnam)