FOREX-Optimism on U.S. debt deal sees dollar rise vs yen, boosts risk
* Dollar rises vs yen on prospect of U.S. debt deal
* Republicans offer plan to extend Oct. 17 deadline
* Rising risk sentiment helps growth-linked currencies
LONDON, Oct 11 (Reuters) - The dollar traded near a two-week peak versus the yen on Friday while growth-linked currencies outperformed as signs of a breakthrough in the U.S. budget impasse lifted investors' appetite for risk.
Rates on U.S. bills maturing on Oct. 17 were off highs, pricing in a retreat in the chances of a historic debt default next week while the stock volatility index fell as global equities rose. That led investors to pare positions in currencies like the yen and Swiss franc used as safe havens by investors in times of political and financial nerves.
Although there was no deal after a 90-minute meeting between President Barack Obama and Republican leaders, talks continued into the night in an effort to reopen the government and avert a default.
Republicans offered to extend the government's borrowing authority for several weeks, temporarily putting off a default, while Obama was pushing to also reopen government operations that have been closed since Oct. 1.
The dollar was up 0.2 percent at 98.32 yen, just below an intraday high of 98.56 yen that was the highest since Oct. 1. Support was at the 200-day moving average of 96.89 yen.
Currencies like the Australian and the New Zealand dollar which tend to benefit when hopes for global growth rise were up 0.2 percent at $0.9470 and 0.7 percent at $0.8334 respectively. The euro was also up 0.3 percent at $1.3555.
"Markets believe some kind of deal or postponement (of the Oct. 17 default deadline) will ease the tension...we had a very strong rally in equities and dollar/yen is higher and that is a signal there is a bit more risk appetite in the market," said Niels Christensen, FX strategist at Nordea.
"There is still a lot of uncertainty and I don't expect any big moves today in currencies."
The fiscal impasse has taken the spotlight off the Federal Reserve. But there is a growing suspicion that the central bank will have to wait to evaluate the impact of a virtual government shutdown that is now in its 10th day before starting to scale back stimulus for the economy.
"If it was not already, it will be near impossible for the Fed to commence tapering before year-end if only a six week debt extension is agreed," said Tom Levinson, FX strategist at ING, in a note to clients.
He said the dollar index would struggle to sustain a rally to 81.00, the level it reached before the Fed shocked markets on Sept. 18 by opting not to start trimming bond-buying.
The dollar index, which tracks the greenback against a basket of major counterparts was down 0.1 percent at 80.386, having risen to as high as 80.595 on Thursday, its highest since Sept. 26.