* Dollar firms against euro on rising U.S. yields
* Traders eye Fed rate hike sooner than anticipated
* Dollar falls against yen on safe-haven bids (Updates prices, adds analyst comments; changes byline, dateline; previous LONDON)
By Sam Forgione
NEW YORK, June 10 (Reuters) - The dollar extended gains against the euro on Tuesday after expectations that the Federal Reserve could raise U.S. interest rates sooner than previously expected, but fell against the yen on safe-haven demand for the Japanese currency.
Traders said that strong U.S. economic data, including the government’s nonfarm payrolls report last Friday showing employment returned to pre-recession levels, supported the view that the Fed could take a more hawkish stance on tightening monetary policy at its meeting next week.
“If broader measures are suggesting that the U.S. economy is on a stronger footing, the market has to bring forward the expectations of a Federal Reserve rate hike,” said Aroop Chatterjee, currency strategist at Barclays in New York.
Traders’ bracing for potential signs of a Fed rate hike earlier than forecast helped push U.S. government bond yields higher, which in turn drew demand for dollars.
Expectations for strong U.S. retail sales data on Thursday, in a week of scarce economic data, bolstered views of a Fed rate hike earlier than previously anticipated, traders said. Traders currently expect the Fed to hike rates in the second half of 2015, based on U.S. short-term interest rate futures.
Comments from St. Louis Federal Reserve Bank President James Bullard on Monday also signalled the potential for the U.S. central bank to raise rates sooner. Bullard said encouraging U.S. economic data could prompt him to move forward his view on when rates should be raised.
Traders have said signs of a rate hike are positive for the dollar, since higher U.S. bond yields encourage capital flows into Treasuries. The benchmark 10-year Treasury note was last down 10/32 in price to yield 2.647 percent.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, was last up 0.17 percent at 80.795, pulling further away from a near two-week trough of 80.240 touched last Friday. The dollar was up 0.28 percent against the Swiss franc to trade at 0.8996 franc.
The euro was last down 0.34 percent against the dollar at $1.3547 but was still higher than a four-month low of $1.3503 hit last Thursday after the European Central Bank announced its monetary stimulus measures.
The ECB’s latest policy measures could weigh on the euro for months, said Mark McCormick, currency strategist at Credit Agricole in New York.
The dollar was last down 0.23 percent against the yen , however, to trade at 102.29 yen. McCormick of Credit Agricole said weakness in Japanese stocks drove safe-haven demand for yen.
“People have been taking profit in the long Nikkei trade,” McCormick said. Tokyo’s Nikkei average closed down 0.85 percent on Tuesday. (Reporting by Sam Forgione; Additional reporting by Patrick Graham in London; Editing by James Dalgleish)