* Signs of progress in Washington debt negotiation ease default fear

* Market still cautious as deal yet to be sealed

* The proposed deal may be seen as stop-gap measure

* Dollar near 2-week high vs yen

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 deal to reopen the U.S. government and avert a possible debt default for the time being.

The dollar changed hands at 98.64 yen, having erased losses since the start of week, staying near its highest level in two weeks. It rose as high as 98.71 yen in early trade.

The dollar's index against a basket of currencies stood at 80.367 , 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 $1.3550, well within recent trading band centering $1.35-1.36.

Senate Majority Leader Harry Reid said that he and his Republican counterpart, Mitch McConnell, have made strong progress toward reaching a deal.

Hopes that a deal could be reached before Oct. 17, when the U.S. Treasury could technically be in default on its debts eased investors' fears.

Still, many uncertainties remain, given that any deal would have to win approval in the House of Representatives, where conservative Republicans pegged any continued government funding to 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. 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," said Masafumi Yamamoto, forex strategist at Praevidentia Strategy.

Several Fed policymakers are due to speak later in the day, including Chairman Ben Bernanke, who will speak via prerecorded video at 0100 GMT.

Any hint that the Fed will delay tapering its bond buying would reduce U.S. interest rates and thereby the yield on dollars.