* Euro hits three-week high but gives up gains
* Investors see rise in U.S. yields as overdone
* Fed expected to stick with quantitative easing mantra
* Australian dollar breaks parity with greenback, again (Updates prices, adds details)
NEW YORK, Dec 14 (Reuters) - The euro pared gains and retreated from a three-week high against the dollar on Tuesday after stronger-than-expected U.S. retail sales data lifted bond yields and optimism about the economy.
The data, coupled with U.S. President Barack Obama's deal last week to extend tax cuts for all earners, left traders on alert to see if the Federal Reserve gives any hint at its Tuesday meeting of altering a $600 billion bond-buying program designed to push long-term interest rates lower.
A statement from the Federal Reserve is expected at 2:15 p.m. EST (1915 GMT).
"The Fed could be interesting depending on how vocal they are in either committing to the full amount now that they've got additional fiscal stimulus or whether they feel they have to step on the gas to get rates back down," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
The euro, which began the week at $1.32, hit a three-week high near $1.35 overnight after rising above the 38.2 percent retracement of its November decline. It was last at $1.3415, up 0.2 percent on the day. Dolan said a close above $1.3450 could set up a near-term rally to $1.37.
The euro "may have room to run higher if the Fed reasserts its commitment to purchasing $600 billion, citing the weakness in inflation and spare capacity weighing on unemployment," Brown Brothers Harriman strategists said in a note to clients.
The Australian dollar hit a one-month high above parity with the greenback as oil prices rose but then eased, while the dollar was little changed at 83.40 yen.
Traders also said year-end positioning and low trading volume was exaggerating some price swings.
U.S. YIELDS STILL IN FOCUS
The tax cut deal has prompted economists to upgrade their U.S. growth forecasts, but it also pushed up bond yields for fear it will swell the deficit.
The dollar rose with yields last week but fell on Monday when Moody's warned the tax cuts could move it a step closer to cutting the United States' triple-A credit rating.
Some strategists said fear of imminent U.S. inflation and higher long-term rates was premature.
"The recent rise in front-end U.S. yields looks overdone as core inflation isn't going to pick up quickly," said Gavin Friend, currency strategist at nabCapital.
"Also euro zone bond spreads seem to have stabilized on the back of the recent ECB buying, which has helped the euro."
The European Central Bank stepped up its purchases of government bonds last week, although the amount bought was still well below levels reached last spring.
The euro also hit a three-week high against the yen, shrugging off the weaker-than-forecast current conditions element of the German ZEW survey.
But it pared gains after the S&P rating agency said Belgian sovereign debt could be downgraded within six months, sparking fear of contagion from the euro zone crisis.
The U.S. dollar and euro both fell to session lows against the Swiss franc ahead of the Federal Reserve announcement. (Reporting by Nick Olivari and Steven C Johnson; Additional reporting by Neal Armstrong in London; Editing by James Dalgleish)