December 3, 2014 / 7:41 AM / 3 years ago

FOREX-Dollar sets 7-year high vs yen; Aussie tumbles after weak GDP

4 Min Read

* Dollar sets fresh 7-year high vs yen

* Dollar index touches 5-1/2 year peak

* US economic outperformance, higher yields bullish for USD

* Aussie falls to 4-year low after Q3 GDP disappoints (Updates rates)

By Masayuki Kitano and Ian Chua

SINGAPORE/SYDNEY, Dec 3 (Reuters) - The dollar hit a seven-year peak against the yen on Wednesday, following a rise in U.S. bond yields and Federal Reserve officials' mostly upbeat comments on the outlook for the U.S. economy.

The greenback also rose against the Australian dollar, which slid to a four-year low after data showed Australia's economy unexpectedly slowed last quarter, prompting markets to price in more chances of an interest rate cut.

Against a basket of currencies, the dollar rose to its highest level in more than 5-1/2 years. The dollar index touched a high of 88.718, its loftiest level since March 2009.

Against the yen, the dollar climbed to 119.44 yen on trading platform EBS, its strongest level since August 2007. The dollar last traded near 119.34 yen, up 0.1 percent on the day.

Besides the psychologically key 120.00 yen level, the greenback faces resistance at about 119.56 yen, the 23.6 percent retracement of its 1985 to 2011 decline.

The dollar was supported by a mostly rosy outlook for the U.S. economy given earlier this week by New York Fed President William Dudley and Vice Chair Stanley Fischer.

Providing a positive backdrop for the dollar, U.S. Treasury yields have risen this week, with the two-year yield trading at 0.551 percent, having pulled up from a one-month low of 0.457 percent set on Monday.

"In terms of flows, overseas (non-Japanese) players seem to be buying (dollars against the yen) aggressively on dips," said a trader for a Japanese bank in Singapore.

The same trader urged caution, in case Japanese officials voice concerns over the yen's weakness in an attempt to placate voters ahead of Japan's general election on Dec. 14.

Although a fall in the yen can be positive for Japanese exporters' earnings, it can also push up import costs and place a burden on households.

In November, Japanese Finance Minister Taro Aso had warned about the yen's weakening, describing it as "too rapid" while sticking to the government's stance of allowing markets to determine exchange rates.

The dollar has been rising against the yen on the back of a diverging trajectory of monetary policies in the United States and Japan. Many market participants expect the Fed to raise interest rates some time next year, while the Bank of Japan just expanded its monetary stimulus in late October.

Dollar-selling by options players could help slow the greenback's rise against the yen for now, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.

"I am expecting a grind higher rather than a rush to 120," Halley said.

The euro eased 0.1 percent to $1.2367, hovering within sight of two-year low of $1.2358 set in early November.

The Australian dollar fell 0.5 percent to $0.8399. Earlier on Wednesday, the Aussie dollar fell to $0.8388, its lowest level since July 2010. (Additional reporting by Reuters FX analyst Krishna Kumar in SYDNEY; Editing by Simon Cameron-Moore)

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