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* Dollar gains on yen as hopes remain alive of deal before Thursday
* Even if deadline passes, deal by Monday could avoid default-strategist
By Lisa Twaronite
TOKYO, Oct 16 (Reuters) - The dollar rose against the yen in early Asian trade on Wednesday, after a U.S. Senate source said a deal to extend the U.S. debt limit could be reached within hours.
The Senate deal would fund the U.S. government through Jan. 15 and create a deficit-reduction panel, a source told Reuters.
The dollar was up about 0.4 percent against the yen at 98.50 yen <JPY= > moving away from an intraday low of 98.07 yen hit on Tuesday in the wake of Fitch's announcement that it had put the U.S. rating on credit watch. The dollar moved back toward a two-week high of 98.72 yen touched in the previous session.
Hopes were put on ice late on Tuesday, as the Republican-led U.S. House of Representatives has failed so far to produce a plan to avert a government default even as Thursday's deadline loomed large. It abandoned plans to vote on any measure on Tuesday.
President Barack Obama will meet with Treasury Secretary Jacob Lew on Wednesday, the White House said late on Tuesday.
The greenback skidded to its session lows on Tuesday after Fitch Ratings warned that it could cut its sovereign credit rating of the United States from AAA, citing the political impasse over raising the debt ceiling.
The dollar index was slightly higher at 80.494 after climbing as high as 80.703 on Tuesday, its highest since Sept. 18.
Kathy Lien, managing director at BK Asset Management, said in a note to clients that she did not expect the dollar to drop another 5 or 10 percent even if the Oct. 17 deadline passed without a deal.
"If Congress manages to pass a bill to raise the debt ceiling and reopen the government by Monday, it would still be enough time to avoid a default," she said, as the U.S. won't miss its first bond payment exactly on Oct. 17.
Until the $16.7 trillion statutory borrowing limit is actually increased, investors are seen shunning Treasury bills maturing in the latter half of October because of the possibility of a "technical default."
The U.S. Treasury's weekly auctions of three- and six-month bills drew below-average demand as investors feared a delayed or missed coupon payment. The value of bids received for the sales over those accepted was the lowest since 2009.
The euro was nearly flat from U.S. levels at $1.3524, recovering from a two-week low of $1.3478 hit early on Tuesday.