* Dollar hits one-month highs vs euro, yen as yields rise
* Sterling gains on BoE inflation outlook
* U.S. data adds to upward pressure on dollar, yields (Adds comment and updates prices)
By Steven C. Johnson
NEW YORK, Nov 10 (Reuters) - The dollar hit a one-month peak against the euro and yen on Wednesday as higher U.S. bond yields prompted traders to cut bets against the greenback.
Fear about Ireland's high debt burden left investors seeking shelter in German bunds, which also helped push the euro lower against the dollar for a fourth straight day.
Strong U.S. economic data, including a decline in initial jobless claims, even had some analysts suggesting the U.S. economy was starting to gain traction after months of frustratingly slow growth.
Investors had sold dollars in recent months and bet that the Federal Reserve plans to pump more money into the economy to boost growth would drive already low U.S. rates even lower. So far, those expectations have been frustrated.
"The U.S. yield curve has steepened, and since the whole world has had the same position on, we've got a lot of end-of-the-year, risk management going on," said Sebastien Galy, senior currency strategist at BNP Paribas.
The euro fell as low as $1.3671 and was last changing hands at $1.3720, down 0.4 percent. BNP Paribas said it could fall as far as $1.3435 as it retraces a multi-month rally that peaked last month at $1.4281, a 9-1/2-month high.
The dollar climbed as high as 82.79 yen, up more than 1 percent, as U.S. yields rose relative to Japanese ones. A close above 82.95 yen, the 55-day moving average, could signal a solid break out of the pair's multi-month downward trend.
The about-face has been evident across financial markets, with stocks and commodities also retreating in recent days, and this may signal that investors expect Fed policy to be effective in boosting U.S. growth.
"I think, in some cases, at least, we might be seeing more of a position reversal than simple profit-taking," said Shaun Osborne, senior strategist at TD Securities in Toronto.
Traders were awaiting a 30-year Treasury bond auction later on Wednesday, with some expecting strong demand.
FUNDING CURRENCY QUESTIONS
Elsewhere, sterling rose 0.4 percent to $1.6075 after a Bank of England inflation report made further monetary easing in the UK look less likely. The euro fell 1 percent to 85.33 pence.
The Australian dollar, a top performer this year, thanks to high interest rates, commodity wealth and trade links with China, dipped 0.1 percent to $1.0023. Galy said it was unlikely to retest a recent 28-year high near $1.02 this year.
The euro struggled after Portugal was forced to pay a higher premium than previously at a bond auction and after Ireland's central banker said Irish bond yields were at "crisis levels." The gap between benchmark Irish and German bond yields expanded to a euro lifetime high.
Some analysts said the euro's losses would be limited, as the European Central Bank has signaled plans to stick to a tighter monetary policy than the Fed, which plans to pump more money into the U.S. economy over the next eight months.
"Despite the correction we've been seeing, the euro's bull trend is still in place," said John Hydeskov, senior currency analyst at Danske Bank in Copenhagen.
Osborne also noted that the Fed had yet to start its bond- buying program, which could keep bond and currency markets volatile in the coming months.
But if U.S. yields keep rising and the U.S. economy shows signs of improvement, Galy said investors may start using other low-yielding currencies, such as the euro and yen instead of the dollar, to finance more lucrative trades.
"The question is what the funding currency should be and that's what investors are trying to figure out right now," he said. 'It's still very early on and people are still very short dollars, but we expect some shakeouts in the euro crosses." (Additional reporting by Jessica Mortimer in London; Editing by Jan Paschal)