FOREX-Dollar index at 2-week high on hopes of U.S. breakthrough
* Dollar rises broadly, euro and yen all push lower
* Fed minutes shows most board members still expect tapering
* Dollar still vulnerable if no resolution found
By Anirban Nag
LONDON, Oct 10 (Reuters) - The dollar rose on Thursday, trading at its highest in two weeks against a basket of currencies on signs Washington was moving towards breaking a stalemate over debt and averting a possible U.S. default.
A rise in U.S. 10-year Treasury yields to 2.70 percent from 2.60 percent just a week ago was also helping. The dollar index rose to 80.537, extending its recovery from an eight-month low of 79.627 hit a week ago.
The euro was down 0.15 percent at $1.3506, extending losses into a third session.
The U.S. currency received an additional boost after the minutes of the Federal Reserve's September meeting revealed the decision not to slow stimulus was a "close call" and that most board members supported tapering bond-buying later this year.
While the latest fiscal problems are likely to see those expectations of tapering fade, the minutes nonetheless offered broad support to the dollar.
"There have been some positive developments regarding the debt ceiling and while they may be short-term measures, they offer some relief to the dollar," said Neil Mellor, currency strategist at Bank of New York Mellon.
"The Fed minutes are also talking about tapering later this year, all of which is nudging markets to cover positions before the weekend."
House Republican leaders will visit the White House on Thursday as the search for a way to break the impasse continues.
Some Republicans and Democrats floated the possibility of a short-term increase in the debt limit to allow time for broader negotiations on the budget.
"There are hopes that Washington is moving on the deadlock over the government shutdown and debt ceiling. The dollar looks set to gain if these problems are solved," said Sho Aoyama, senior market analyst at Mizuho Securities.
Against the yen, the dollar rose 0.4 percent to 97.65, up from a two-month low of 96.55 yen hit on Tuesday.
One trigger for investor buying was the dollar's success staying above its 200-day moving average in the past few days. The average stood at 96.83 on Thursday.
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 level since the 2008 financial crisis, reflecting investor anxiety.
Many investors are now looking to U.S. Treasury Secretary Jack Lew's testimony before the Senate Finance Committee later on Thursday on his latest estimate on the Treasury's funding positions, as well as possible contingency plans.
Lew has said the Treasury will run out of additional borrowing authority on Oct. 17.