* Slovakia seen eventually approving EFSF expansion
* Yuan firm after U.S. Senate passes China trade bill
* Dollar hits highest vs yen since early September
By Wanfeng Zhou
NEW YORK, Oct 12 (Reuters) - The euro rallied on Wednesday to a near one-month high against the dollar on hopes Slovakia would eventually approve an expansion of the euro zone rescue fund critical to containing the region’s debt crisis.
Slovakian lawmakers struck a deal to ratify a plan to bolster the European Financial Stability Facility (EFSF) by Friday, a day after a junior party blocked its passage.
Investors also took comfort from German Chancellor Angela Merkel’s comment that she was certain of full ratification of the bailout fund’s expansion by the Oct. 23 European Union summit.
Reduced worries about Europe’s debt crisis prompted investors to exit bets against the euro. Gains in the single currency accelerated after it broke option barriers at $1.37 and resistance in the $1.3815-$1.3820 region, traders said.
“Investors are willing to put risk back on the table for now. As a result, we are seeing an acceleration in net buying of the euro,” said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.
The euro last rose 1.1 percent to $1.3808, after touching a high of $1.38340 on the EBS trading platform, its strongest since Sept 16.
The euro rallied 1.9 percent to 106.57 yen , after peaking at 107.035 yen, the highest since Sept. 9.
Traders said the euro’s rise could be limited by lingering concerns about political hurdles to containing the euro zone crisis and a deteriorating growth outlook in the region.
“This is a short-term technical squeeze without much fundamental support,” said Paresh Upadhyaya, head of Americas G10 FX strategy at Bank of America Merrill Lynch in New York.
The dollar rose 0.8 percent to 77.27 yen, having hit a one-month high of 77.489 on EBS. Against a basket of currencies, the dollar index fell to a three-week low of 76.796 and was last down 0.9 percent.
The currency market showed little reaction to minutes from the Federal Reserve’s last policy meeting.
China’s yuan was firm against the dollar after the U.S. Senate passed a trade bill aimed at pressing Beijing to lift the value of its currency, raising tension between the world’s two biggest economies.
Republican House Speaker John Boehner said he opposes the Senate-passed bill, while China urged the Obama administration to block the proposal. Analysts said it was unlikely the bill would become law.
Karl Schamotta, senior market strategist at Western Union Business Solutions in Calgary, said punishing China for its undervalued exchange rate will do little to address underlying imbalances because China would retain a “significant cost advantage” even if the yuan was trading at a market level.
“I’d expect to see conciliatory gestures on both sides in the weeks ahead - possibly including a limited rise in the exchange rate peg itself,” he said. “The lessons of the dirty thirties have been heeded in many circles - many policymakers understand that beggar-thy-neighbour simply lowers home values across the entire neighborhood.”