* Dollar rises vs yen on prospect of U.S. debt deal * Obama and Republicans struggle to reopen gov't, raise debt limit * Dollar index on pace for 0.3 percent gain this week By Wanfeng Zhou NEW YORK, Oct 11 (Reuters) - The dollar edged lower against a basket of major currencies on Friday but was still headed for its first weekly gain in five, as optimism grew that Washington may soon clinch a stop-gap deal to avert a devastating U.S. default. President Barack Obama and congressional Republican leaders moved to end their fiscal impasse on Friday but struggled to strike a deal on the details for a short-term reopening of the federal government and an increase in the U.S. borrowing limit. Uncertainty remained, however, given the high likelihood that no deal will be reached to raise the limit by the Oct. 17 deadline, analysts said, which could pressure the dollar and help safe-haven currencies such as the yen. Worries about the U.S. budget and debt crisis had driven the dollar to an eight-month low last Thursday. "A short-term deal would keep the level of uncertainty relatively high and likely keep consumers' and business sentiment pressured," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C. "The ongoing fiscal drag would, in turn, likely keep the Federal Reserve from scaling back its monetary easing further into 2014." The dollar index, which tracks the greenback against a basket of six major currencies, slipped 0.1 percent to 80.352. It's on pace for a gain of 0.3 percent this week, the first weekly rise since early September. Options investors are curbing bets that profit from a stronger dollar, with one-week euro/dollar risk reversals showing options investors sought the smallest protection against the euro's depreciation since January. One-year risk reversals show demand for euro puts, the right to sell the euro at a future date, at its smallest since April. The dollar rose 0.2 percent to 98.36 yen, having hit a session peak of 98.55 yen, according to Reuters data, the highest since Oct. 1. Support is seen at the 200-day moving average of 96.87 yen. The euro rose 0.3 percent to $1.3558. Paul Bednarczyk, head of research at 4CAST, said markets were hoping for a deal before the end of the weekend. "If we get a deal that is more than just can-kicking, then equities will go up and dollar/yen will go up with it. There is a very reliable correlation at the moment and nobody is going to fight it," he said, adding that the dollar could target 100 yen. High-yielding, growth-sensitive currencies rose. The New Zealand dollar gained 0.6 percent to $0.8327. The Australian dollar added 0.2 percent to $0.9470. The fiscal impasse has taken the spotlight off the Federal Reserve for now but expectations are growing that it will have to evaluate the impact of the government shutdown, now in its 11th day, before starting to scale back its stimulus under which it buys $85 billion per month of Treasuries and mortgage bonds. A survey showed Friday that U.S. consumer sentiment deteriorated in October to its weakest in nine months as the first federal government shutdown in 17 years undermined Americans' outlook on the economy. The dollar showed little reaction to the data. "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 U.S. central bank surprised markets on Sept. 18 by opting not to start trimming its bond buying.