* Euro at 6-1/2 month high versus yen, 3-week high vs dollar
* Helped by expectations of an eventual Greek deal
* Euro zone flash manufacturing PMI not as bad as forecast
* Yen slides to 7-1/2 month low versus U.S. dollar, Aussie
By Philip Baillie
LONDON, Nov 22 The euro hit its highest point against the yen since late April on Thursday on expectations that international lenders will soon agree an aid deal for Greece and that Japan will ease monetary policy again.
The single currency also rose to a three-week high against the dollar helped by euro zone data showing manufacturing activity slowed less than expected in November.
The PMI data eased some concerns about a deepening euro zone recession, adding to the sense of relief after an earlier survey showed manufacturing in China expanded for the first time in 13 months.
But gains looked fragile as the euro zone economy was likely to struggle in coming months, keeping alive the chances of further interest rate cuts by the European Central Bank.
The euro hit 106.585 yen, and by mid afternoon was up 0.3 percent at 106.20 yen. More gains could see it target resistance at the 100-week moving average around 106.69 yen.
The single currency rose 0.4 percent on the day to $1.2876 according to EBS data, its highest since early November. Traders cited steady buying by U.S. investors with sentiment helped by lower yields on Greek and Spanish bonds.
"The lack of any really bad news today has helped euro higher after the failure of lenders to agree on a Greece deal earlier in the week," said Saeed Amen, quantitative FX Strategist at Nomura.
German Chancellor Angela Merkel said on Wednesday an agreement to release aid to Athens was still possible next Monday, helping the euro recover after Greece's international lenders had earlier failed to reach a deal.
"There is less concern about whether a deal on Greece will eventually be struck," said Arne Lohmann Rasmussen, head of currency research at Danske Bank. "People are pricing out the tail risk on Greece..."
He added that investors were squaring recent short positions in the euro and other riskier currencies before the long weekend in the United States. Volumes would be thin, however, due to the U.S. Thanksgiving holiday on Thursday.
YEN TO SLIDE
Analysts said expectations of aggressive monetary easing in Japan would encourage yen-funded carry trades, in which investors borrow in low-yielding currencies like the yen to invest in higher-yielding assets. That could help the euro retain its recent gains on the yen.
The dollar has climbed around 4 percent against the yen in the last seven trading sessions, amid market expectations that Japan's next government could push its central bank to implement more drastic monetary stimulus.
The dollar rose to 82.84 yen, its highest since early April, in early trade. It then pared some of those gains on selling by macro funds. The yen also hit a 7-1/2 month low versus the higher-yielding Australian dollar and against sterling.
Shinzo Abe, the leader of Japan's opposition Liberal Democratic Party, which holds a commanding lead in opinion polls ahead of a Dec. 16 election, has called for "unlimited" easing until 2 or 3 percent inflation is achieved and for pushing short-term interest rates to zero or below.
Analysts say yen weakness could persist until the vote is over.
"We think the yen will continue to weaken against the dollar related to elections on December 16 when the BOJ is expected to be more aggressive in its easing...but the move has been a bit too fast," said Marcus Hettinger, Global FX Strategist at Credit Suisse.
He added the bank's target for the euro is to reach 108 yen in three months' time. But he said he expects a target of 80 for dollar/yen, largely from dollar weakness in 2013 as the Federal Reserve considers more monetary easing.
But optimism on the U.S. budget front has grown after leading legislators recently expressed confidence that they could reach a deal to avert the so-called fiscal cliff of spending cuts and tax hikes due to take effect in early 2013.