FOREX-Dollar firm on hopes U.S. debt deal may be around corner

Tue Oct 15, 2013 12:11am EDT

* Signs of progress in U.S. debt talks ease default fear

* Market still cautious as deal yet to be sealed

* Proposed deal may be seen as stop-gap measure

* Dollar near 2-week high vs yen

* Rising risk appetite lifts Aussie to 4-month high

By Hideyuki Sano

TOKYO, Oct 15 (Reuters) - The dollar held firm on Tuesday, hitting a two-week high against the yen as top U.S. senators signalled they could soon reach a bipartisan deal to reopen the government and avert an immediate debt default.

Moves in major currencies were mostly modest, however, as investors remained wary of further political bickering. The exception was the Australian dollar, which jumped to a four-month high, getting an extra lift from meeting minutes showing Australia's central bank was in no hurry to cut interest rates.

"Excessive pessimism about the U.S. has receded," said Kyosuke Suzuki, director of forex at Societe Generale. "People have been building dollar long positions, giving consideration to the risk of not having dollars when a deal will eventually be signed."

The dollar rose as high as 98.71 yen, its highest level in two weeks, before giving up gains to trade at 98.47 yen, down 0.1 percent on the day. Still it maintained much of its recovery from a two-month low of 96.55 hit a week ago.

The dollar's index against a basket of currencies stood at 80.329 , having bounced back from Monday's low of 80.126 and keeping some distance from an eight-month low of 79.627 hit earlier this month, just after the U.S. government entered a partial shutdown.

The euro was little changed at $1.3558, well within a recent trading band of $1.35 to $1.36.

Senate Majority Leader Harry Reid on Monday suggested a deal could be announced as early as Tuesday. His comments boosted hopes that a final deal could be reached before the Thursday deadline to raise the U.S. debt ceiling.

AUSSIE SHINES

Still, many uncertainties remain, given that any deal would have to win approval in the House of Representatives, where there will likely be stiffer resistance from conservative Republicans who demand more spending cuts.

The plan under discussion in the Senate is not particularly inspiring to markets either, as it seeks only to raise the debt ceiling through mid-February 2014 and to fund the government operations to the middle of January.

"This is unlikely to lead to a sustainable rally in the dollar and shares," said Masafumi Yamamoto, forex strategist at Praevidentia Strategy. "U.S. policy makers are just kicking the can and we will have another showdown in January. Under such circumstances, it would be difficult for the Fed to reduce its stimulus."

The debt crisis has taken talk of the Fed's tapering its stimulus off the table for now, as the government shutdown since the start of this month has hurt consumer sentiment.

Receding expectations of Fed tapering are a boost for high-yielding currencies, such as the Australian dollar, which had been hit by worries about a shrinking yield advantage over the dollar earlier this year.

Against this backdrop, the Australian dollar hit a four-month high, also benefiting from increased risk sentiment on expectations of an imminent deal on the U.S. debt ceiling.

In addition, minutes of the Reserve Bank of Australia's October policy meeting showed that the central bank was in no hurry to lower rates and did not look overly concerned by the recent currency rise.

The Aussie rose as high as $0.9534, above its Sept. 18 peak of $0.9518 hit after the Fed's surprise decision not to trim back its stimulus. It last stood at $0.9527, up 0.5 percent on the day.

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