* Dollar holds close to one-month high vs yen
* Talk of Fed rate hike sooner than expected supports dlr
By Satomi Noguchi
TOKYO, June 8 (Reuters) - The dollar rose against a basket of currencies on Monday extending sharp gains made late last week as U.S. Treasury yields rose to seven month highs, prompting investors to cover short-dollar positions.
Smaller-than-expected job losses in the United States in May sparked concerns on Friday that the Federal Reserve may lift interest rates sooner than previously thought, helping push up Treasury yields, dealers said.
The dollar slid from a one-month peak against the yen touched on Friday as investors sold the greenback to take profits, but remained largely supported despite selling from Japanese exporters, dealers said.
"The market is weighing how much more U.S. yields will rise and how they will impact the U.S. stocks and the economy," said a senior trader at a Japanese bank.
Two- and 10-year U.S. Treasuries yields hit highest levels since November in Asia on Monday as Treasuries extended losses.
Some market players fretted that the rise in Treasury yields could hurt US equities, which in turn could encourage investors to buy the dollar back to reduce risk exposure.
"If U.S. shares continue to rise, then the dollar may resume falling with investors wanting to shift funds into riskier and higher-yielding currencies such as the Australian dollar. But that may not be the case if the yield rise hurts U.S. stocks," said the trader at a Japanese bank.
The dollar index, a gauge of the greenback's value against a basket of six major currencies, rose 0.2 percent to 80.834 after choppy trade. The dollar index rose 1.6 percent on Friday, its best performance since Dec. 19, according to Reuters data.
The dollar fell 0.2 percent to 98.47 yen, but stayed near a one-month high of 98.90 yen on trading platform EBS on Friday.
The euro fell 0.2 percent to $1.3943, sliding back towards a one-week low of $1.3925 hit earlier on EBS after rebounding briefly. Against the yen, the euro slipped 0.4 percent to 137.31 yen.
The pace of U.S. job losses slowed sharply last month, the strongest sign to date that the recession is diminishing, even as the unemployment rate hit its highest in nearly 26 years.
"The currency market is focusing on U.S. short-term interest rates as talk of a rate increase by the Fed has emerged," said Akira Takeuchi, a manager at Chuo Mitsui Trust and Banking.
Dealers said that market participants will also focus on a slew of Treasuries auctions this week. The U.S. government is scheduled to sell $65 billion in debt including 10-year and 30-year securities.
Sterling fell 0.7 percent to $1.5868 on political uncertainties in the UK.
Britain's Prime Minister Gordon Brown faced a renewed challenge to his leadership on Monday after support for the ruling Labour Party plunged to its lowest level in a century in European elections.
The Australian dollar rose 0.4 percent to $0.7970 and it gained 0.3 percent to 78.50 yen. But traders said Aussie trading was subdued due to a market holiday in Australia.
(Additional reporting by Kaori Kaneko; Editing by Joseph Radford)