* Elevated U.S. bond yields help dollar
* Gap between 2-year US/Japan bond yield at 1-1/2 year high
* Euro hits 1-month high versus yen, Nowotny’s comments help
By Anirban Nag
LONDON, Aug 23 (Reuters) - The dollar hit a three-week high against the yen on Friday and held steady versus a basket of currencies, helped by this week’s rise in U.S. bond yields.
But it slipped against the euro in the wake of comments from European Central Bank policymaker Ewald Nowotny who said he did not see much reason for the ECB to cut interest rates. He spoke after surveys showed euro zone activity picking up at a faster pace.
The dollar rose 0.2 percent to 98.95 yen, having hit a three-week high of 99.14 yen on trading platform EBS.
Against the euro, however, the dollar was slightly softer at $1.3365.
“The euro seems irrepressible at the moment, but we think the Fed normalisation story will win out for the dollar,” said Chris Turner, head of currency strategy at ING.
The euro had set a six-month high of $1.3453 earlier this week, supported by a recent improvement in euro zone economic data. A second reading of German gross domestic product data confirmed that Europe’s biggest economy grew by 0.7 percent in the second quarter, helped by domestic demand.
The recent pick-up has pushed euro zone money market rates higher and if sustained is likely to challenge the effectiveness of the ECB’s pledge to keep rates low until a full-fledged recovery is in place.
The euro touched a one-month high against the yen at 132.34 yen and last stood near 132.15 yen, up 0.2 percent.
As the Jackson Hole symposium kicked off, the focus will be on influential Federal Reserve Vice Chair and policy dove Janet Yellen, who is scheduled to speak on Saturday.
The dollar index, which has a strong correlation with U.S. yields, was flat at 81.513 but higher on the week.
Yields got a boost this week after minutes of the Fed’s July meeting released on Wednesday did little to change expectations that the central bank will start winding down its stimulus programme as early as next month.
The gap between two-year U.S. Treasury yields and their Japanese counterparts is at its highest since March 2012 and this will draw more Japanese investors into U.S. Treasuries, analysts said.
For the dollar’s rise versus the yen, traders cited decent demand from U.S. funds and Japanese buyers with stop-loss buy orders cited above 99.15 yen.
“We have seen a bit more interest in buying dollars after the Fed minutes earlier this week,” said Chris Walker, currency strategist at Barclays. “We are forecasting the 10-year U.S. yields to rise to 3.75 percent by the end of the third quarter of 2014. That should be helpful for the dollar.”
The U.S. 10-year Treasury yield last stood near 2.8844 percent, not far from a two-year high of 2.936 percent set on Thursday.
“The widening spread between Treasuries and Japanese government bond yields has created the conditions for further dollar/yen upside,” UBS said in a note.