* Dollar/yen resistance at 103.25 - strategist
* Euro bounces off 5-week low vs dollar
* Dollar index muscles up, close to highest since July 2012
By Sophie Knight
TOKYO, May 15 (Reuters) - The dollar eased slightly against the yen on Wednesday after hitting its highest level since October 2008 in the previous session, but retained its broad strength, emboldened by signs of a firm recovery in the U.S. economy and rising Treasury yields.
The dollar index was steady at 83.618, just below its Tuesday high of 83.687, which was its loftiest level since July 2012. Analysts said it was set to make further gains after breaching resistance at its April 4 high of 83.494 in the previous session.
Against its Japanese counterpart, the dollar retreated 0.2 percent to 102.24 yen, after reaching 102.42 in the previous session on the EBS trading platform, its highest since October 2008. Some analysts see the pair’s next knot of resistance at 103.50.
“Right now the market is dominated by dollar strength, and I think that will continue for a while,” said Kyosuke Suzuki, director of FX at Societe Generale.
“It’s mainly due to strong data - and if employment drops to just above 7 percent, near to the Fed’s mandate of 6.5 percent, then I think an end to its easing programme could be in sight,” he said.
On Tuesday, data showed U.S. import prices fell in April due to a drop in oil costs, a positive sign for household finances that also indicated benign inflation pressures.
Signs of an improving economic landscape in the U.S. have fired up speculation that the Federal Reserve will begin to wind down its asset-purchasing programme as soon as this year, which would likely push Treasury yields higher.
If the Bank of Japan’s bond-buying programme has the desired effect of driving down domestic bond yields, further widening the yield spread between U.S. and Japanese bonds, Japanese investors are expected to increasingly shift their money abroad.
However, the spread was little changed on Wednesday, when Japanese government bond prices fell for a fourth straight session.
“For now, I think the dollar-yen will hang around 100, but if the Fed’s exit policy becomes a reality at the end of the year, the range could be more like 105-110,” said Koji Fukaya, CEO of FPG Securities.
“But a stable rate around 100 would be better for the Japanese economy as a whole... people will not tolerate an even weaker yen just because the stock market is rising. The real economy is still not so good,” he said.
The BOJ could further ease monetary policy as early as October if consumer prices do not rise as quickly as projected, according to economists polled by Reuters, who also upgraded their growth forecasts.
The euro bounced off a five-week low of $1.2921 plumbed earlier in the session to tack on 0.1 percent to $1.2935.
The single currency remains on the defensive given the potential risk of the European Central Bank slashing its deposit rate into negative territory and charging depositors for parking their funds with the ECB.
The euro received little boost after Fitch ratings agency upgraded Greek sovereign debt to ‘B-’ from ‘CCC’ on Tuesday.
Due to the yen’s broad weakness, however, the common currency held near a fresh 3-year high struck on Tuesday of 132.78 yen, although it was 0.1 percent lower than late U.S. levels at 132.11.
“Yesterday we saw some real money inflows pushing the euro/yen up, but I think this is pretty much its trading range for now. It will be difficult for it to break out without some more positive euro zone factors,” said Suzuki of Societe Generale.
The Australian dollar was steady at $0.9893, but remained under pressure after a rate cut from the central bank last week kicked it under parity. However, it held just above a fresh 11-month low of $0.9877 plumbed on Tuesday.