* Euro hovers below $1.3200, stops/support about $1.3165
* Dollar edges above 84.00 yen, needs to sustain move
* U.S. yields edge higher
By Charlotte Cooper
TOKYO, Dec 13 (Reuters) - The euro slipped on Monday, looking set to remain in its downtrend for now, while the dollar edged up, supported by higher Treasury yields after improving U.S. data late last week.
The euro has been under steady pressure in recent weeks on concerns over debt levels in peripheral euro zone states, and many in the market expect that pressure to remain, with some looking for a re-test of this month's low at $1.2969.
There was talk of a mixture of automatic stop-loss sell orders and take-profit orders on the euro in the $1.3165-80 area, just below the day's low of $1.3182, and then euro bids at $1.3150 and more sell stops below that.
Currency speculators trimmed short positions against the dollar last week but more than doubled their bets against the euro, according to data from the Commodity Futures Trading Commission, signalling growing bearishness on the currency.
"Euro positioning made a determined incursion into short territory last week, for the first time since early September, suggesting the escalating sovereign debt saga continues to take its toll," wrote Gareth Berry, a FX strategist at UBS in Singapore.
A trader at a Canadian bank cautioned, however, that if the market was too heavily short on the euro at this point there was a risk of a short-covering rebound.
On the charts, resistance was expected up at $1.3280.
The euro was 0.3 percent down from U.S. trading levels, at $1.3196 on trading platform EBS.
European Union leaders meet later this week.
But while core euro countries Germany and France have pledged to better align tax and labour policies to foster convergence, they rejected calls for a rescue fund to be increased or for joint sovereign bonds, and the lack of unity over a solution is expected to keep pressuring the currency sporadically.
U.S. YIELDS
The dollar has been supported by a rise in Treasury yields following a proposal in the United States to extend Bush era tax cuts, which is seen as helping the economy, and economic indicators have been improving, if unevenly.
Consumer sentiment data on Friday showed confidence at its highest in six months. The data fits into a pattern of an economy that is gaining traction after a slowdown and is likely to intensify the debate on whether the Federal Reserve needs to keep stimulating the economy through asset purchases.
The Fed meets on Tuesday and officials are expected to assess its second round of quantitative easing announced in November, the prospect of which dragged the dollar lower in September and October. But they are not expected to signal any shift away from their intention to buy $600 billion in government debt, despite Washington's proposal to extend tax cuts.
The benchmark Treasury yield has touched its highest in six months, at 3.39 percent, but the dollar, while supported by the more attractive returns, has not gunned much higher against the yen in the same period.
Robert Ryan, an FX and interest rate strategist at BNP Paribas in Singapore, said the two-year yield was probably a better gauge of economic and dollar recovery prospects at this stage as the 10-year yield response could be complicated by longer term concerns about the U.S. budget deficit.
The two-year yield climbed to 0.67 percent on Monday, its highest since July.
Dollar/yen has a mildly positive 90-day rolling correlation with the two-year yield of just below 0.7 at the moment, less pronounced than in July and September when both yields and the dollar were falling.
The dollar rose 0.2 percent to 84.10 yen. The 84 yen level is a barrier it has struggled to hold above in the past few couple of weeks.
Traders reported that Japanese exporters had been selling dollars at 84.00 to 84.05 yen, with more offers expected above 84.50. The dollar has resistance up at 84.41 yen, a two-month high set in late November.
The dollar index, a gauge of its performance against six major currencies, rose 0.3 percent to 80.26 but is still below a two-month high of 81.44 set in late November.
The high-yielding Australian dollar, which has export ties to China, was steady at $0.9845.
It showed little reaction to a jump in China's inflation rate reported at the weekend after the Asian giant on Friday hiked its reserve requirement ratio, the amount of money lenders must keep in reserve, for the third time in a month. (Additional reporting by Yoko Matsudaira, and contribution by Reuters FX analyst Krishna Kumar in Sydney and IFR analyst John Noonan; Editing by Michael Watson)