* Euro rises near 1-month highs against dollar, yen
* Slovakia seen eventually approving EFSF expansion
* Better-than-expected data also stoke euro's gain
* Yuan firm after U.S. Senate passes China trade bill (Updates market action, changes dateline, previous London)
By Richard Leong
NEW YORK, Oct 12 (Reuters) - The euro rose on Wednesday to near one-month highs against the dollar and yen on hopes that Slovakia eventually would approve an expansion of a program seen critical to combat the euro zone debt crisis.
China's yuan was firm against the dollar after the U.S. Senate passed a trade bill aimed at pressing Beijing to lift the value of its currency, raising the tension between the world's two biggest economies. [ID:nL3E7LC02V]
The tentative optimism over the euro persisted despite the Slovak parliament's rejection on Tuesday of a plan to strengthen the European Financial Stability Facility (EFSF). Investors took the view that the remaining member of the 17-nation euro zone block would eventually gather a majority to endorse the 440-billion-euro scheme. [ID:nL5E7LC0JT]
"No one really believes Slovakia is able to stop the ratification of the EFSF, and that's why euro/dollar is not lower," said Niels Christensen, currency strategist at Nordea in Copenhagen.
Investors also took comfort from German Chancellor Angela Merkel's comment that she was certain of ratification of the bailout fund's expansion by the Oct. 23 European Union summit. [ID:nB4E7KT01M]
The euro extended its recent gains after surprisingly strong data on the region's industrial output in August and as traders exit short positions against the single currency, analysts said.
"The market is repricing the risk of an 'end-of-the-world' scenario. The chance of a sharp recession has diminished," said Paresh Upadhyaya, head of Americas G10 FX strategy at Bank of America Merrill Lynch in New York.
Traders said the euro
The euro also rallied against the yen
Traders said the euro's rise could be limited as the gains looked overdone, with concerns lingering about political hurdles to containing the euro zone crisis.
"This is a short-term technical squeeze without much fundamental support," said Bank of America's Upadhyaya. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro zone debt crisis graphics http://r.reuters.com/hyb65p Calculator on banks' needs http://r.reuters.com/jyw62s Yuan's rise vs US dollar http://link.reuters.com/rac44s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
U.S.-CHINA TENSION
Analysts said investors are wary about growing tension between the United States and China as a trade bill intended to pressure Beijing to loosen its currency policy makes its way to the U.S. House of Representative after the U.S. Senate passed it on Tuesday.
China urged the Obama administration to block the proposal that would allow the United States to slap duties on its products from countries found to be subsidizing their exports by undervaluing their currencies. [ID:nL3E7LC02V]
Despite heated exchanges between Washington and Beijing, analysts said it was unlikley the bill would become law.
"As long as China does not believe the United States would implement it, it is going to ignore it," Bank of America's Upadhyaya said.
But if chances of its passage grow, China -- which is the biggest U.S. creditor -- could retaliate, he added.
Worries of China's retaliatory steps were offset by moves
among government-controlled Chinese banks, which appeared to
have pumped dollars into the market, pushing the yuan to end at
6.3585
Outside of the yuan, the dollar touched a three-week low against a basket of currencies. The dollar index <.DXY> fell 0.6 percent at 77.108, above an earlier low of 76.796. (Additional reporting by Jessica Mortimer in London; Editing by Padraic Cassidy)