* RBA minutes help Australian dollar to 4-month high
* Signs of progress in U.S. debt talks ease default fear
* FX market still cautious as deal yet to be sealed
By Jessica Mortimer
LONDON, Oct 15 (Reuters) - The Australian dollar hit a four-month high against the U.S. dollar on Tuesday, lifted by Reserve Bank minutes showing policymakers in no hurry to cut rates and optimism a U.S. deal to avert default would soon be reached.
U.S. Senate Majority Leader Harry Reid, a Democrat said after a day of talks on Monday with his Republican counterpart, Mitch McConnell that they had made "tremendous progress" and suggested a deal could come as early as Tuesday.
The comments raised expectations final agreement could be reached before a Thursday deadline to raise the U.S. debt ceiling and boosted riskier currencies such as the Aussie.
Moves in most major currencies were modest, however, as investors remained wary of further political bickering.
The Australian dollar rose 0.6 percent to $0.9547, its strongest since mid-June, after minutes showed no urgency to lower borrowing costs, while policymakers did not seem overly concerned by the currency's recent rise.
"The main trigger for the move in the Australian dollar was the minutes, which were slightly on the hawkish side," said Richard Falkenhall, currency strategist at SEB.
The euro held steady at $1.3561, within its recent $1.35 to $1.36 trading range.
The dollar dropped 0.2 percent to 98.35 yen, having earlier hit a two-week high of 98.71 yen. However. it remained well above a two-month low of 96.55 yen hit a week ago.
"If we get some kind of temporary resolution in the U.S. it will have a small positive short-term impact on the dollar. But in the medium term this is clearly dollar negative," SEB's Falkenhall said.
The dollar index against a basket of currencies stood at 80.31 , off Monday's low of 80.126 and above an eight-month low of 79.627 hit earlier this month, just after the U.S. government entered a partial shutdown.
Many uncertainties remain, however. The plan under discussion in the Senate seeks only to raise the debt ceiling through mid-February 2014 and to fund government operations to the middle of January.
"This is unlikely to lead to a sustainable rally in the dollar and shares," said Masafumi Yamamoto, forex strategist at Praevidentia Strategy in Tokyo. "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."
Chart: WorldWideMarkets Alpha Trader