* Dollar near 7-week high vs yen, euro near 3-½ month low
* Rise in U.S. yields supports dollar
By Charlotte Cooper
TOKYO, Dec 22 (Reuters) - The dollar hovered close to its highest in more than three months against the euro and more than a month against the yen, supported by year-end unwinding of short positions in the greenback and a rise in Treasury yields.
Yields on U.S. Treasury debt climbed on Monday as expectations of a stronger growth outlook for the world's largest economy helped push the benchmark 10-year note yield through 3.62 percent to its highest since mid-August.
The prospect of low U.S. interest rates has weighed on the dollar this year, increasing its attractiveness as a funding currency to buy assets with higher returns. But improving data has led some to review when they think the Federal Reserve might start to tighten policy.
"The dollar has strengthened recently with a rise in U.S. yields relative to those of other major economies reflecting recent strengthening in their indicators, and that has certainly helped the dollar turn the corner a bit," said Greg Gibbs, a currency strategist at RBS in Sydney.
"It does all get back to when the Fed may or may not be tightening policy and the market is heading towards thinking they will get to tightening in Q3 next year."
The dollar, which broke to its highest since early November against the yen on Monday, was trading at 91.06 yen, slightly down from the high of 91.24 set on trading platform EBS.
The greenback climbed above its 100-day moving average against the yen on Monday, a bullish sign after it hit a 14-year low of 84.82 yen at the end of November.
The moving average is at 91.03 yen on Tuesday and sustaining the move above it would be a signal of improved dollar strength.
The spread between the yield on the U.S. two-year note and Japan's two-year bond has widened to about 70 basis points from about 48 basis points at the start of the month.
A Reuters poll of U.S. primary government securities dealers last week showed most expect the Fed to raise rates by the end of the first quarter of 2011, once the U.S. jobless rate has peaked, although expectations ranged from the second quarter of next year to 2012.
Chicago Fed President Charles Evans said he expected the economy to grow 3.0-3.5 percent over the next 18 months but low inflation would give the Fed room to keep monetary policy easy for an extended period..
The euro hovered at $1.4280, just above a 3-½ month low of $1.4262 set late last week.
After trending higher against the dollar since March, it has come under fire this month on concerns about the fiscal health of some countries in the currency bloc, with Greece's sovereign ratings downgraded by two rating agencies this month.
European Central Bank Governing Council member Athanasios Orphanides was quoted as saying there was no risk of a euro zone country defaulting on its debt but also that Greece should not expect other EU countries to come to its rescue.
The dollar index, a measure of its performance against six other major currencies, held steady at 78.036, near a high of more than three months set at 78.144 on Monday.
It was also testing two-month highs against the pound and the Australian dollar.
The yen was quiet on the crosses, and one trader for a major Japanese bank said there was little dollar selling interest from Japanese exporters at the moment while the dollar was in the midst of a broad rally. (Additional reporting by Masayuki Kitano; Editing by Michael Watson)