FOREX -Euro touches 6-week high on banking deal view; dollar falls
* EU seen creating euro zone banking union
* Euro rises for 6th straight day
* Fed's Bullard spoke Monday of possibility of small taper in December
NEW YORK, Dec 10 (Reuters) - The euro climbed to a six-week peak against the dollar on Tuesday, helped by expectations of a banking deal in the euro zone and a growing view that the Federal Reserve would need additional positive data before it can decide to reduce its economic stimulus.
Europe's common currency gained for a sixth straight day versus the greenback and is within sight of this year's high of $1.3832.
The euro's rise caused the dollar index to extend losses into a second straight day. It fell to six-week lows, dragged down by lower U.S. Treasury yields, as investors have pretty much removed the prospect of a reduction in the Fed's asset purchases this month. The dollar index was last down 0.2 percent to 79.98
But the market's focus has been on the euro and its resilience.
European Union finance ministers, meeting in Brussels, are likely to create a banking union with powers to close down failing euro zone banks. The issue is crucial as a banking union is widely viewed as shoring up the euro zone against future debt and financial crises.
"There's some expectation that a deal may be reached before year-end, and that is supportive of the euro," said Sireen Harajli, currency strategist at Mizuho Bank Ltd. in New York.
On the monetary policy side, a combination of the European Central Bank's less-dovish tone and the failure to focus on negative interest rates at the last meeting has also underpinned the euro.
The euro rose as high as $1.3795, its strongest level since late October. It was last at $1.3767, up 0.2 percent on the day.
"We're going to see a breakout in the euro soon and we could see it test $1.39," said Andres Bergero, chief corporate trader at Bank of the West in San Ramon, California.
"The euro zone economy is still fairly fragile, but there aren't as many fires as before. So there is a perceived notion that things are little bit better, a little more stable in Europe."
The euro, however, has become over-valued, according to BNP Paribas' short-term estimates, and should decline the next few weeks. Current fair value for the euro is at $1.3590, BNP said, rising from $1.3535 previously.
Against the yen, the euro hit a five-year peak of 142.17 yen , a high not seen since October 2008, but it was last down 0.3 percent at 141.49 yen.
The euro has gained over 1.5 percent against the dollar and 2.7 percent versus the yen since the ECB last week refrained from following up on November's rate cut and said it has yet to come up with a detailed plan on which tools to use and when.
Traders said investors seemed to have pretty much priced out the risk of the Federal Reserve scaling back monetary policy soon, which might help explain why the dollar has not risen broadly in the past few sessions.
"We had pretty good data for the U.S. last week and that has prompted some to expect tapering in December, but I think that's not realistic," said Mizuho's Harajli. "I think we need to get more information, more data before the Fed can actually decide on that."
Economists polled by Reuters on Monday expect the Fed will begin reducing its massive bond-buying program in March.
Still, one Fed official has left the door open for a December taper. James Bullard, the St. Louis Fed president, said on Monday that the Fed could slightly reduce its monthly bond purchases this month in reaction to signs of an improved labor market. The Fed holds its policy meeting next week.
Against the yen, the greenback fell 0.5 percent to 102.78 yen.
One possible concern for yen bears is that support for Japanese Prime Minister Shinzo Abe dropped after he steam-rolled through parliament a tough secrecy act that critics fear could muzzle media and allow officials to hide misdeeds.
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