* Dollar gains ground as Treasury yields soar
* Euro eases, but supported by talk of central bank bids
By Ian Chua and Chikafumi Hodo
SYDNEY/TOKYO, Dec 15 (Reuters) - The dollar rose against other major currencies on Wednesday after upbeat U.S. economic data helped to send U.S. yields higher, although thinning volumes into the year-end meant trading was choppy.
The 10-year Treasury yield flew to a seven-month high just above 3.50 percent, extending a move that started on Tuesday after U.S. retail sales rose for a fifth straight month in November, prompting economists to ratchet up fourth-quarter growth forecasts.
Despite improving growth prospects, the Federal Reserve reaffirmed its commitment to buy $600 billion in bonds, a move that could add fuel to the economic bonfire in coming months.
The rise in yields helped the dollar to reverse losses on the yen, taking it back up near the 84.00 yen resistance it has tussled with all month, and abruptly ended a short squeeze in the euro, which rose on Tuesday partly on talk of heavy buying by Asian central banks.
"A sharp rise in U.S. Treasury yields is spurring short-covering in the dollar," said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank.
"I'm not sure whether this will be a long-term uptrend, but in the short term the dollar could advance further."
The dollar rose 0.2 percent to 83.85 yen, helped by talk of demand at the Tokyo fix but with resistance expected ahead of 84.50 yen, a level it has not seen since late September.
Options barriers were expected up at that level, with defensive selling expected on the way up. Support was pegged around 82.50.
U.S. RECOVERY
Peter Frank, strategist at Societe Generale, said dollar/yen looked at risk of an upward lurch from widening U.S./Japan rate spreads, particularly if there was more upbeat U.S. data ahead.
"Positioning is also a risk for the yen with the latest IMM data showing the speculative market is still clinging on to large net long yen positions," he said.
The low-yielding yen fell to its weakest in seven months against the higher-yielding Australian dollar on Tuesday at 83.69 yen, but the Aussie backed off the high on Wednesday as it retreated following a test of parity with the U.S. dollar.
Mounting optimism about the U.S. recovery and recent solid growth data from China, coupled with the fact that Beijing has so far refrained from lifting interest rates, have put commodity currencies back in the limelight.
The Aussie was trading at $0.9951 after gaining 1-½ cents this week to reclaim parity and reach a one-month high of $1.0030 on Tuesday. It rose to its highest in 28 years last month and traders did not rule out another push.
"I think this will set us up for a retest of the highs near $1.0200," a trader said.
The euro retreated from a three-week high at $1.3500 to trade at $1.3350, failing to stay above $1.3470, which is roughly the 38.2 percent retracement of its November fall.
Chartists said that, if it can hold above support at $1.3280-1.3325, it could retest $1.3500. But if that support band gives way, the euro is likely to slip into a $1.3165-1.3500 range before eventually breaking down to test its November low at $1.2969.
The dollar gained 0.2 percent against a basket of major currencies to 79.55, having climbed off a three-week low plumbed on Tuesday. (Additional reporting by Charlotte Cooper in Tokyo, contributions by Reuters FX analysts Rick Lloyd in Singapore and Krishna Kumar in Sydney, and IFR FX analyst Haruya Ida; Editing by Edmund Klamann)