* U.S. Senate announces deal on debt ceiling * Senate deal likely to be approved by House * Dollar/yen trades around three-week high By Gertrude Chavez-Dreyfuss NEW YORK, Oct 16 (Reuters) - The dollar rose against most currencies on Wednesday after the Senate announced a deal that would avert a U.S. default on its debt and re-open a government that has been partially shut down for two weeks. The greenback had risen earlier to a three-week high against the yen and a two-week peak versus the euro as investors had been expecting a deal before the Oct. 17 deadline, when the U.S. Treasury's borrowing authority runs out. Senate Majority Leader Harry Reid and Republican leader Mitch McConnell announced the agreement on Wednesday on the Senate floor, where it was expected to win swift approval. The main Republican critic of the deal, Senator Ted Cruz of Texas, said he would not use procedural moves to delay a vote. The deal that emerged on Wednesday would extend U.S. borrowing authority until Feb. 7, although the Treasury Department would have tools to temporarily extend its borrowing capacity beyond that date if Congress failed to act early next year. It would also fund government agencies until Jan. 15. "This is a near-term positive for the dollar as it looks like the House will likewise agree to the deal. If the House approves the deal, then that's a big game-changer," said Brian Dangerfield, currency strategist at RBS Securities in Stamford, Connecticut. The positive news helped stoke some risk tolerance and also pushed the dollar up against the Swiss franc and sterling. In late afternoon New York trading, the dollar was up 0.7 percent against the yen at 98.81. It hit a high of 98.97, the highest since Sept 27. The dollar index was flat on the day at 80.507, peaking at 80.754, the highest since Sept 18. The dollar had taken a hit earlier from Fitch Ratings' warning that it could cut the U.S. sovereign rating from AAA, citing the political spat over the debt ceiling. But sentiment turned more positive as the global trading day progressed. With the U.S. political gridlock expected to fade to the sideline for now, U.S. economic fundamentals should reclaim much of the market spotlight. And the dollar's fundamental health appears a bit suspect as the shutdown likely held back growth, said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. The euro was little changed on the day against the dollar at $1.3526, having hit a low of $1.3472, a two-week trough. The British pound fell 0.3 percent against the dollar to $1.5951, while the dollar gained 0.1 percent against the Swiss franc to 0.9137. Analysts said even if a last-minute deal is forged, it may give only a short-term boost to the dollar because the whole fiscal drama in Washington has likely delayed the Federal Reserve's move to begin trimming its bond-buying stimulus program. "The heightened probability that the Fed will stay the course for the rest of the year with the current pace of monthly bond purchases as part of its QE (quantitative easing) program is likely to keep the U.S. dollar on the back foot," said Samarjit Shankar, director of market strategy at BNY Mellon. If Congress were to fail to reach a deal approved by both the Senate and the House of Representatives by Thursday, checks would likely go out on time for a short while for everyone from bondholders to workers who are owed unemployment benefits. But analysts warn that a default on government obligations could quickly follow, potentially causing the U.S. financial sector to freeze up and threatening the global economy. Until the 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.