* Euro sits by more than 2.5 year peak as U.S. dollar sinks
* GBP hits 1 year top, Brexit negotiations eyed; other majors firm
* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E
SYDNEY, Dec 4 (Reuters) - The euro was headed for its best week in a month on Friday and has blown past major resistance levels as investors piled into bets the U.S. dollar has further to fall as the world begins to emerge from the COVID-19 pandemic.
The common currency is up 1.5% for the week so far and last sat comfortably at $1.2140. Having finally breached $1.2000 after multiple attempts, momentum funds have surged in to long positions. The next serious chart resistance level is not until $1.2555.
The euro is also set for its best week against the Japanese yen in six months, even though the yen rose a little against a broadly weaker dollar overnight. Sterling touched a one-year high and the yen hit a two-week top.
“The euro is holding above the $1.21 level for the first time since spring 2018, despite the fact that there is only a week to go before the European Central Bank is expected to add more policy stimulus,” said Rabobank strategist Jane Foley.
“There is no doubt that the actions of the Federal Reserve have been hugely successful at weakening the value of the dollar since the spring this year.”
Investors have turned heavily short dollars in recent months, figuring rates will stay low for a long time in the United States forcing yield-seekers to head elsewhere for better returns.
Against a basket of currencies the dollar has shed about 12% from a three-year high of 102.990 in March, to hit a two-and-a-half year low of 90.504 on Thursday.
The Australian dollar struck a 28-month high of $0.7449 overnight and is up nearly 0.8% for the week so far.
The New Zealand dollar made a fresh 31-month high overnight and is set for its fifth consecutive weekly gain, a streak which has put it 8.6% above late-September lows.
“Call it December seasonality come early, call it what you will, but the market’s appetite for the kiwi is insatiable at the moment,” ANZ Bank’s chief economist Sharon Zollner and strategist David Croy said in a note on Friday.
“And while the rubber bands of momentum and valuation are starting to get stretched, technically it looks very solid; commodity prices are rising; and nobody wants to own dollars ... a break of 0.7160 would be extremely bullish.”
Even worries about painful winter of deaths and lockdowns in the United States has failed to drive too much safe-haven demand for dollars, as investors reckon on more government support - either in the form monetary easing or fiscal spending.
A $908 billion aid plan gained momentum in Congress on Thursday as conservative lawmakers expressed their support and the Federal Reserve meets later in the month amid speculation it could expand its bond-buying programme.
Both are viewed as negatives for the dollar since bond buying would keep yields anchored, and spending could support a bullish mood and the buying of riskier currencies.
Investors are looking to U.S. jobs figures due later on Friday for the latest signs of the recovery losing momentum, while the fate of the pound is largely in the lap of Brexit trade deal negotiators who remain locked in talks.
“Traders need to assess their sterling exposures into the weekend,” said Chris Weston, head of research at Melbourne brokerage Pepperstone.
“If I were running long exposures, I wouldn’t be adding ... but questioning, if we see a deal, how punchy the gapping risk will be,” he said. “If we don’t get a deal and the rhetoric from (EU negotiator Michel) Barnier or the British camp shows limited progress then we could see GBPUSD gap lower on Monday.” (Reporting by Tom Westbrook; Editing by Christopher Cushing)
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