* US dollar gains vs euro after better-than-expected data
* Ireland, sovereign debt crisis continue to weigh on euro
* AUD gains after China raises banks' reserve requirement
(Updates prices, adds quotes, details, changes byline)
By Julie Haviv
NEW YORK, Dec 10 (Reuters) - The U.S. dollar firmed against the euro on Friday as better-than-expected U.S. economic data increased the allure of the greenback, with gains expected to continue if Treasury yields keep rising.
The U.S. trade deficit narrowed much more than expected in October, a Commerce Department report showed. [ID:nN09288102]
A Thomson Reuters/University of Michigan Surveys of Consumers' preliminary December consumer sentiment index rose to 74.2 from 71.6 in the final November reading, according to a report. Economists in a Reuters survey expected a preliminary December reading of 72.5. [ID:nNLLANE6PM]
U.S. Treasury prices widened losses after the data. [ID:nN10358024] The drop in prices bodes well for the dollar as it increases demand for higher yielding assets.
The rise in U.S. Treasury yields over the last three sessions has boosted the dollar on the view that the Obama administration's proposed tax cut extension would spur economic growth.
"The strength of the U.S. dollar could be viewed as waning if it can be demonstrated credibly that U.S. deficits will rise and conversely the euro could rise comparatively," said Tim Speiss, chairman, Personal Wealth Advisors at EisnerAmper LLP in New York.
"However, the EU has it's hands full with financing costs related Ireland and Greece, and potentially Spain and Portugal, so we see no dramatic negative dollar impact tied to this legislation at this juncture," he said.
The U.S. dollar <.DXY> index, which tracks the greenback's performance against a basket of major currencies, rose 0.17 percent to 80.202, struggling to break through the 80.00-81.50 barrier that capped its November rally.
Against the Japanese currency, the greenback was up 0.23
percent at 83.87 yen
AUSTRALIAN DOLLAR RALLIES
The Australian dollar staged a relief rally on Friday after China increased the reserve requirement for banks but kept interest rates on hold.
The Aussie -- which is most sensitive to monetary tightening in China given Australia's close trading links with the country -- dipped briefly after Beijing increased the reserve requirement by 50 basis points. [ID:nTOE6B907U]
The Australian dollar rose 0.10 percent to $0.9853
"In recent weeks people have been talking about the possibility of a rate hike in China," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"Given they only announced a reserve requirement hike we are seeing a bit of a relief rally as it has given a small boost to risk appetite. This has especially helped the Aussie and the New Zealand dollar."
Sentiment towards the euro was shaky after Moody's said on Thursday it may downgrade the ratings of some Portuguese banks. [ID:nWNA6521] The announcement followed Fitch's earlier decision to slash Ireland's rating by three notches. [ID:nLDE6B81AH]
In early New York trade, the euro was 0.28 percent lower at
$1.3205
Ireland's government will seek parliamentary approval for an 85-billion-euro IMF/EU rescue package next week, though there were concerns about political infighting as the opposition Labour Party pledged to vote against it. [ID:nLDE6B81XS]
Traders say no end is in sight for the debt crisis with European leaders now clashing over the idea of joint euro zone bonds. [ID:nLDE6B70R1] French President Nicolas Sarkozy met German Chancellor Angela Merkel on Friday to prepare a joint position for next week's EU summit. [ID:nLDE6B823X]
Merkel said on Friday there was no question of boosting a euro zone financial safety net and reiterated her opposition to the issue of joint euro bonds. [ID:nBAE003860]
(Additional reporting by Jessica Mortimer in London)