By Lisa Twaronite and Dominic Lau
TOKYO (Reuters) - Asian shares rose to their highest in nearly five months on Tuesday on heightened hopes for a deal in Washington to reopen the U.S. government and avert a possible debt default, though investors will remain wary until they see the final outcome.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.8 percent to its highest since May 23. Japan's Nikkei share average added 0.5 percent, hitting a two-week peak as the market reopened after a holiday.
"The market is still precarious," said Takuya Takahashi, an analyst at Daiwa Securities. "Even if default can be avoided, investors are not ready to take risk at this point."
Several markets in the region were closed for holidays on Tuesday, including Singapore, Indonesia and India.
Against a basket of major currencies, the dollar was up about 0.1 percent, moving away from an eight-month low hit after the U.S. government shutdown started earlier this month.
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The dollar bought 98.49 yen, slightly down on the day but recovering from a low of 98.05 hit on Monday. It also stabilised at $1.3555 against the euro.
While investors expect U.S. politicians will reach a deal before Thursday's deadline to raise the U.S. debt ceiling in order for the country to meet its obligations, the risk of failure is present.
"Our sense is not complacency, but more a belief that a true default, beyond a technical delay in payments lasting several days, is highly unlikely, and a lack of clarity of what such a default would mean for markets beyond a sense that it will be bad," JPMorgan analysts wrote in a note.
"Market participants appear to be preparing for the event risk of a delayed payment of U.S. Treasury coupons and principals by adding liquidity and avoiding securities maturing around the debt ceiling deadline."
The fiscal plan being discussed by U.S. senators would raise the $16.7 trillion debt ceiling by enough to cover the country's borrowing needs at least until mid-February, according to a source familiar with the negotiations.
It would also fund government operations until the middle of January, though some fear that would just set the stage for another standoff then.
"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.
Even if the Senate reached a deal, it would still need approval in the House of Representatives, where it is unlikely to sail past conservative Republicans. It remained unclear whether Congress would be able to pass the legislation needed to avert the default by the deadline.
U.S. S&P 500 E-mini futures added about 0.1 percent early on Tuesday, indicating a firmer open if the gains were to be maintained. U.S. Treasury futures slipped 7 ticks.
On Wall Street, the S&P 500 index rose 0.4 percent to its highest close in nearly one month on signs of progress in the political negotiations for a budget deal.
In the commodity markets on Tuesday, gold was nearly flat at $1,273.16 an ounce.
U.S. crude slipped 0.1 percent to around $102 a barrel, giving up some of Monday's gains as traders bought contracts to cover short positions ahead of a possible deal in Washington.
(Additional reporting by Ayai Tomisawa and Hideyuki Sano in Tokyo; Editing by John Mair)