FOREX-Dollar clings on to signs of U.S. breakthrough
* Dollar rises broadly, yen under pressure
* 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 near its highest in two weeks against a basket of currencies on signs of a break in the stalemate in Washington that might avert a potential U.S. debt 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 was at 80.420, extending its recovery from an eight-month low of 79.627 hit a week ago.
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 mute those expectations of tapering, the minutes nonetheless offered support to the dollar which has been sold off in the past few weeks.
"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.
Against the yen, the dollar was up 0.5 percent to 97.82, 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.
DOLLAR VULNERABLE TO STRESS
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.
"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 favourite anxiety index, the VIX index closed on Wednesday at 19.60, after rising to 21.34 at one point. 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.
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.