* Rising U.S. yields push dollar/yen to near 2-month high
* Euro hits 3-1/2-month low after Greece rating downgrade
* U.S. existing home sales surge, but Q3 GDP revised lower (Updates prices, adds comment, details)
By Wanfeng Zhou
NEW YORK, Dec 22 (Reuters) - The dollar climbed to its highest level in nearly two months against the yen on Tuesday as U.S. bond yields rose after strong housing data underpinned expectations for a U.S. economic recovery.
The euro fell to a 3-1/2-month low against the dollar, pressured by worries about Greece's fiscal health after Moody's became the third major rating agency to downgrade the country's debt rating this month.
U.S. existing home sales surged a surprisingly strong 7.4 percent last month as prices continued to fall, data showed on Tuesday. The report offset a sharper-than-expected downward revision to U.S. third-quarter growth and boosted optimism about a recovery in the world's largest economy.
"The stronger housing market number helped dollar bulls regain control," said Kathy Lien, director of currency research at GFT Forex in New York. "Any negative sentiment from the U.S. GDP report was offset by another strong month for existing home sales."
The dollar was last up 0.6 percent at 91.70 yen, after touching as high as 91.86 yen, according to Reuters data, its strongest since late October.
The euro dropped to $1.4219, according to Reuters data, the lowest level since early September. It was last down 0.3 percent on the day at $1.4237.
Moody's on Tuesday cut Greece's rating by one notch to A2 from A1.
"The next crucial step is for Greece to outline credible steps to deal with its deficit," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "This will continue to be a big structural negative for the euro that will remain in place over the medium term."
The ICE Futures dollar index, a measure of its performance against six other major currencies, hit a more than three-month high at 78.449.
RISING YIELDS
Expectations for stronger U.S. growth boosted U.S. Treasury yields and widened the spread between short-term U.S. and Japanese government bond yields, providing an impetus for traders to bid up the dollar against the yen.
In Japan, Bank of Japan Governor Masaaki Shirakawa said on Monday the bank will maintain its current "effective zero interest rates" and is ready to act promptly to fight deflation.
The spread between the yields on the U.S. two-year note and Japan's two-year bond has widened to about 70 basis points from 48 bps at the start of the month.
"The dollar's also up on the Japanese outlook and the backup in U.S. yields," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "The Japanese are committed to preventing yen strength, and some technical breaks higher will have technical and momentum guys coming in to buy dollar-yen."
The negative correlation between the U.S. dollar and stocks that was in place for much of 2009 has broken down in the past few trading sessions, although some analysts expect the link to return next year.
"Once global fund managers come back after the holidays, they will once again be buying equities and other higher-yield assets and selling the dollar," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
But for now, "the trend is your friend, with the trend being a stronger dollar," he added.
Sterling slipped to a more than two-month low of $1.5924, according to Reuters data, after third-quarter UK gross domestic product was revised up less than expected to a 0.2 percent contraction. Sterling was last down 0.6 percent at $1.5944. (Additional reporting by Steven C. Johnson; Editing by Leslie Adler)