* Euro at 6-1/2 month high versus yen, 2-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 dollar
By Jessica Mortimer
LONDON, Nov 22 (Reuters) - The euro extended its gains against a weaker yen on Thursday, hitting its highest since early May on expectations a Greek funding deal would eventually be agreed and that Japan would ease monetary policy further.
The euro was also helped by euro zone data showing manufacturing activity slowed less than expected in November. It hit a two-week high against the dollar.
The figures marginally eased worries about a deepening euro zone recession, especially after an earlier survey revealed manufacturing in China expanded for the first time in 13 months.
The euro rose 0.5 percent to 106.585 yen. More gains could see it target chart resistance at the 100-week moving average around 106.69 yen. A weekly close above that level could leave it poised to rise further.
The single currency rose 0.2 percent on the day to $1.2869 , near a peak of $1.28765 reached on Nov. 7.
“The driving factors behind euro/dollar are that the global macroeconomic backdrop seems to be improving and people are pricing out the tail risk on Greece ... 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.
He said this was encouraging investors to square 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.
But traders said reported demand to sell the euro above $1.2880 may stem its rise.
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.
Danske’s Rasmussen added that expectations of more monetary easing in Japan would encourage yen-funded carry trades, in which investors borrow in low-yielding currencies like the yen in order to investor in higher-yielding assets.
He said the euro could rise to $1.33 and to 110 yen early next year, while the dollar could hit 85 yen or more.
The dollar has climbed around 4 percent against the yen in the last seven trading sessions, with the yen weakened by market expectations that the next Japanese government could push the Bank of Japan to implement more drastic monetary stimulus.
The dollar rose to 82.84 yen, its highest since early April. 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 before an election on Dec. 16, has called for “unlimited” easing until 2 or 3 percent inflation is achieved, as well as pushing short-term interest rates to zero or below.
Analysts say yen weakness could persist until the election next month.
“Obviously it’s based on the fact that if Abe wins, it’s all going to be further easing and further measures to weaken the yen,” said Andrew Robinson, FX analyst for Saxo Capital Markets in Singapore. “I think we have a bit further to go.”
Meanwhile, 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.
The Australian dollar was up 0.1 percent at $1.0374 . Earlier, it touched $1.0401 after the upbeat survey on manufacturing in China, Australia’s biggest export market.