* 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
(Updates prices, adds comment, detail, changes byline, dateline)
By Steven C. Johnson
NEW YORK, Nov 10 (Reuters) - The dollar hit a one-month high against the euro and yen on Wednesday as higher U.S. bond yields prompted traders to cut extended bets against the greenback.
The euro fell below $1.37, its fourth straight daily decline, with traders chalking up some weakness to fear about the ability of some euro zone countries to finance deficits.
Also, more strong U.S. economic data, including a decline in initial jobless claims, had some analysts suggesting the U.S. economy was starting to gain traction after months of frustratingly slow growth.
Data last week showed surprisingly strong U.S. payroll growth in October and improvement in the services sector.
Investors had been dollar sellers in recent months and bet that 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.
He said the euro, which hit a 9-1/2-month high near $1.43 last week, had probably peaked for the year and that the Australian dollar also would fail this year to retest last week's 28-year high of $1.0183. The Australian dollar was last down 0.2 percent at $1.0005.
The dollar was up 0.6 percent at 82.28 yen, near a one-month high of 82.65 yen. The dollar/yen exchange rate is particularly sensitive to movements in the difference between U.S. and Japanese bond yields. The dollar's rise accelerated after it triggered automatic stop-loss orders around 82 yen.
Traders were awaiting a 30-year Treasury bond auction later on Wednesday, with some expecting strong demand.
The euro was down 0.6 percent to $1.3694, near the day's $1.3671 low. Sterling rose 0.4 percent to $1.6041 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.
FUNDING CURRENCY QUESTIONS
An auction of Portuguese government bonds, at which borrowing costs rose compared with a previous auction, weighed on the euro.
Debt worries in Portugal, Ireland and elsewhere have hurt the euro. The gap between benchmark Irish and German bond yields expanded to a euro lifetime high.
Some analysts said euro 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.
BNP's Galy said he expects investor demand for higher-yielding, higher-risk assets to resume next year but said the euro would likely struggle for the rest of 2010.
If U.S. yields keep rising and the U.S. economy shows signs of improvement, he 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 Andrea Ricci)