FOREX-Dollar rises vs yen on signs of U.S. budget progress
* U.S. budget impasse continues, but hopeful signs emerge
* Dollar rebounds against yen but remains on defensive
* Fed to release meeting minutes on Wednesday
NEW YORK, Oct 8 (Reuters) - The dollar rose from a two-month low against the yen on Tuesday as hopes emerged that U.S. lawmakers may reach agreement to raise the U.S. borrowing limit to avoid a default.
But the dollar remained vulnerable as a U.S. government shutdown continues and a crucial deadline to raise the debt ceiling nears. Congress must reach a deal by Oct. 17, when Treasury Secretary Jack Lew has said the government will run out of money to pay its bills.
"With the U.S. government still shuttered, traders and investors are unwilling to push the market too heavy in either direction," said Scott Smith, market analyst at Cambridge Mercantile Group in Calgary, Alberta.
On Monday, President Barack Obama said he would accept a short-term increase in the nation's borrowing authority to avoid default. An influential senator was also said to be floating a plan to cut federal spending and reform the U.S. tax code as part of a broader deal.
The dollar rose 0.4 percent to 97.11 yen, having dropped to 96.55 yen in Asian trade, its lowest since Aug. 12. It then recovered to trade back above chart support at 96.72 yen, its 200-day moving average.
The euro was little changed at $1.3583, pulling away from an eight-month high of $1.3645 touched on Thursday. It showed little reaction to data which showed German industry orders unexpectedly fell in August although the trend was still for growth.
The dollar index, which measures the U.S. currency's value against a basket of currencies, was little changed at 79.932. Last week it hit an eight-month low of 79.627.
"There are a few signs of willingness from the White House and Congress to open up to more constructive discussions, which supports the view that some kind of deal will be reached and has calmed investors' fears," said Niels Christensen, currency strategist at Nordea.
But he added: "The risk is to the downside for the dollar as long as we don't have an agreement ... There may be some more euro buying if it goes above last week's high."
China and Japan, the United States' biggest creditors, are increasingly worried the U.S. government shutdown and standoff over the debt ceiling could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.
The impasse has distracted investors from what had previously been their main preoccupation: the timing of the U.S. Federal Reserve's reduction of its stimulus, which should lift the dollar.
On Wednesday, the Fed will release minutes from its policy meeting last month, when it shocked markets by deciding not to begin reducing its $85 billion a month bond-purchase program.
The higher-yielding and riskier Australian dollar rose 0.4 percent to $0.9464, helped by upbeat surveys on Australian employment and market sentiment.