FOREX-Euro gives up gains versus dollar despite euro zone recovery
* Euro rises briefly after euro zone lifts out of recession
* Gains muted against strengthening dollar
* Dollar lifted by rising U.S. Treasury yields
* U.S. data could boost case for September Fed tapering
By Anooja Debnath
LONDON, Aug 14 (Reuters) - The euro made fleeting gains against the dollar on Wednesday after data showed the euro zone had emerged from its longest recession to date in the second quarter.
However, elevated U.S. Treasury yields and growing expectations the Federal Reserve would begin to scale back its stimulus as early as next month lifted the dollar broadly and the single currency's gains quickly faded.
The euro was down 0.1 percent at $1.3249, off an earlier high of $1.3281. Traders cited stop-loss sell orders below $1.3230 and a break there could see it slip to $1.3155/85.
With stronger-than-expected growth in the currency bloc's largest economies, Germany and France, hauling the euro zone out of six consecutive quarters of contraction, analysts said a fragile recovery was probably taking hold.
The euro zone grew by 0.3 percent, beating the 0.2 percent forecast by economists in a Reuters poll, but this failed to push the euro much higher than after the numbers from the two big economies.
"General dollar demand and rising U.S. Treasury yields are keeping the euro's gains at bay. It didn't react much to the better euro zone GDP data," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank.
With the recovery in the euro zone looking fragile and some peripheral economies still struggling, the European Central Bank is expected to keep rates at record lows for an extended period.
By contrast, expectations the Fed will "taper" its $85-billion-a-month bond-buying programme from September were gaining momentum.
Atlanta Fed President Dennis Lockhart said on Tuesday he could not rule out the Fed reducing stimulus from next month, though he added that U.S. economic performance was too mixed for the central bank to lay out a detailed plan.
"Data in the U.S. will continue to improve and this will support Fed tapering plans and see interest rate differentials move in favour of the dollar," said Niels Christensen, FX strategist at Nordea, who sees the euro at $1.25 by year-end.
The dollar edged up on Wednesday, staying close to Tuesday's near one-week high against a basket of currencies hit after upbeat U.S. retail sales data that sent Treasury yields sharply higher. Ten-year Treasury yields last stood at 2.70 percent, just 5 basis points shy of a two-year high.
The dollar index stood firm at 81.82, having climbed more than 1 percent from the Aug. 8 trough of 80.868.
Traders reported steady corporate demand for dollars and said further gains would hinge on upcoming U.S. data. Producer price data is due on Wednesday but Thursday's industrial production and consumer inflation reports are likely to draw more attention.
However, the dollar fell against sterling as market participants brought forward expectations of a Bank of England interest rate hike on improving UK data and a surprise division among policymakers over the bank's rates guidance.
The dollar was flat at 98.21 yen and traders said a move above 98.50 yen looked difficult in the near term.