* Euro falls for third straight day as debt fears swirl
* Dollar dips below 81.00 yen but recovers
* Risk trade may face reversal as year winds down (Updates prices, adds comment, detail)
By Steven C. Johnson
NEW YORK, Nov 9 (Reuters) - The euro struggled for a third straight session on Tuesday, swinging from gains to losses as investors worried about Irish and Portuguese debt and hedged sizable bets against the U.S. dollar.
Heavy Asian and Middle Eastern buying helped lift the euro off a $1.3823 session low, traders said, but it stalled below $1.40 as investors worried that peripheral euro zone countries may struggle in coming months to finance their deficits.
The euro last changed hands at $1.3873, down 0.4 percent. Traders said an earlier slide below the 76.4 percent retracement of a recent rally that peaked last week near $1.43 suggested it could fall as far as $1.3697 in the days ahead.
"The rebound into the $1.40s was probably a bit too rich for the euro. I don't see much point holding it above there," said Andrew Wilkinson, analyst at Interactive Brokers Group.
The euro hit its recent high after the U.S. Federal Reserve said it would buy $600 billion of Treasuries by mid-2011 to lower interest rates and reinvigorate a sluggish economy.
While that has pushed U.S. bond yields lower and dulled the appeal of dollar investments, Wilkinson said it may boost U.S. growth in 2011, leaving markets to focus on the budget problems in euro zone countries such as Ireland and Portugal.
"I don't think those fears are overblown," he said.
The cost of protecting government debt against default in Ireland and Portugal has risen in the past week, although it eased ahead of a Portuguese bond auction.
Irish debt came under pressure this week on fear the government won't be able to cut spending as much as planned next year, which could complicate efforts to sell fresh debt..
A Chinese credit rating agency Tuesday cut its U.S. rating, citing doubts about the U.S. ability to repay its debts, though the move had little impact on the dollar. The major ratings agencies still give the United States the top rating of AAA, although some have warned about pressures from the rising debt burden on the rating's longer-term outlook.
RISK TRADE GETTING LONG IN THE TOOTH
The euro also fell 0.4 percent to 112.44 yen while the dollar lost 0.1 percent to 81.10 yen.
A pullback in risk-taking sentiment after China said it would strictly manage company short-term foreign debt quotas contributed to yen gains, traders said..
Sterling also fell 0.6 percent to $1.6050, with traders citing heavy selling from "a U.S. investment house," while the Australian dollar was flat at $1.0120, still near a 28-year high at $1.0183.
Low interest rates in developed countries have stoked demand for higher-yielding currencies and assets from fast-growing emerging market economies.
Emerging governments say this causes inflation in their economies, and some have tried to stem foreign money inflows.
Analysts said that means investors should be wary of a sudden pullback in high-yielding emerging market assets.
Traders said some macro accounts and commodity trading advisers, who are short-term players, were already closing their long euro and short dollar forward and futures positions ahead of their book closing at the end of this month or next.
"The 'risk-on' trade has come so far since the end of August. It could have more to go, but I'm skeptical when you've got the Australian and Canadian dollars at par with the U.S. and Asian leaders saying they won't stand for continued inflows of hot money," he said. "At some point, something will crack."
Such a pullback in risk occurred last November, and Citigroup technical strategists said the a similar "momentum divergence" on dollar index charts suggests a rerun of that move may be in store.
The index was up 0.2 percent Tuesday at 77.190, but Citi said charts are "highlighting the risk of a bounce, possibly as far as 79.31, the 200-day moving average." (Additional reporting by Tamawa Desai in London; Editing by Kenneth Barry)