FOREX-Dollar higher as hopes rise of U.S. debt ceiling deal
* House Republicans to propose short-term debt-limit hike
* U.S. jobless claims rise to six-month high
* Dollar still vulnerable if no debt resolution found
NEW YORK, Oct 10 (Reuters) - The dollar climbed to a two-week high against major currencies on Thursday on rising optimism Washington lawmakers might reach a deal to avert a U.S. default.
Republicans in the House of Representatives said they would propose legislation for a short-term debt limit increase to avoid a U.S. debt default. House Speaker John Boehner said the short-term increase is conditioned on an offer by Democrats to start negotiations on fiscal issues.
The dollar came under pressure early this week as the government shutdown dragged on and fears intensified over whether Congress would raise the federal debt ceiling by the Oct. 17 deadline.
The U.S. currency was boosted by a rise in Treasury yields and minutes from the Federal Reserve's September meeting that suggested most board members supported tapering bond purchases later this year.
The dollar index, which measures the greenback against a basket of six major currencies, rose as high as 80.595, the strongest since Sept. 26, extending its recovery from an eight-month low of 79.627 hit last Thursday. It was last at 80.471, up 0.1 percent on the day.
The dollar rallied 0.9 percent to 98.24 yen, rebounding from a two-month low of 96.55 yen hit on Tuesday. Traders said the dollar rebounded after finding strong support at its 200-day simple moving average, currently at 96.82.
The euro was little changed at $1.3523.
Volumes in the euro/dollar and dollar/yen on Reuters Dealing were the highest since Oct. 3.
The dollar briefly pared its gains versus the yen and hit a session low versus the euro after data showed the number of Americans filing new claims for unemployment benefits hit a six-month high last week. But that move was fleeting.
Despite signs of rapprochement in Washington, the dollar could still be vulnerable to concerns about a debt default. Short-term U.S. government bill yields were at the highest since the 2008 financial crisis, reflecting investor anxiety.
"I would not be surprised to see some take profit in the dollar after the recent run. The situation has not really changed, and risk fear is mounting and the VIX is still just below 20 percent," said Francesco Scotto, portfolio manager at RTFX Fund Management Ltd.
Wall Street's favorite anxiety index, the VIX index, last traded down 16.1 percent at 16.44 after hitting 21.34 on Wednesday. A level above 20 is generally associated with increasing concern about the near-term direction of the market.
Banks and money market funds are beginning to shun some Treasuries normally used as collateral in the $5 trillion repurchase agreement market.
The Treasury Department says it will be unable to pay all of its bills if Congress does not raise the $16.7 trillion debt ceiling by Oct. 17. Republicans say the Obama administration would be able to keep up with its bond payments at the expense of other obligations if that deadline was missed but Treasury Secretary Jack Lew said that's not possible.
"It would be chaos," he told the Senate Finance Committee.
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