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FOREX-Dollar rises on Treasury yield spike with world awash in stimulus

* Dollar index up 0.53%

* U.S. PPI annual gain largest in nearly 2-1/2 years

* Graphic: World FX rates tmsnrt.rs/2RBWI5E (Adds details of U.S. PPI data, analyst's comments, updates prices, changes dateline)

NEW YORK, March 12 (Reuters) - The dollar rose on Friday as a fresh spike in Treasury yields reignited inflation fears and sparked a sell-off in riskier assets, allowing the safe haven greenback to recoup its losses from the prior session.

Market participants have grown wary in recent weeks of a possible spike in inflation caused by massive fiscal stimulus and pent-up consumer demand as the pace of vaccinations increases and economies reopen from coronavirus lockdowns.

Data on Friday showed U.S. producer prices (PPI) had their largest annual gain in nearly 2-1/2 years, though considerable slack in the labor market could make it harder for businesses to pass on the higher costs to consumers.

U.S. President Joe Biden signed a $1.9 trillion stimulus bill into law on Thursday and urged U.S. states to make all adults eligible for a coronavirus vaccine by May 1.

Treasuries sold off overnight, with the yield on the benchmark 10-year note rising above 1.6% to approach the one-year highs hit last week.

The dollar was up 0.53% at 91.928, retracing its losses from the prior session and leaving it on track to end the week little changed overall. The greenback hit 92.506 on Tuesday, which was its strongest since November.

“Bond yields have been in a very strong uptrend and with the PPI numbers somewhat higher than consensus, that’s contributing to the rise,” said Kathy Lien, managing director at BK Asset Management.

“That’s widely positive for the dollar, as the greenback has been taking its cues from yields and these new highs are really encouraging more demand for the greenback, especially at a time when you have the ECB accelerating bond purchases and being a little bit more dovish,” she said.

The European Central Bank said on Thursday that it would increase the pace of its money printing to prevent a rise in euro zone bond yields to support the economic recovery.

Although the euro was down around 0.6% at $1.1918, it was set for a small weekly gain.

“The ECB ‘holistic’ approach to keep financing conditions favorable is too vague in our view to focus minds and drive the EUR lower; the U.S. data and the Fed remain the main market drivers,” BofA FX strategists wrote in a note to clients.

Traders will be looking to the U.S. Federal Reserve’s policy meeting next week for any comments about rising yields.

ING strategists wrote in a note to clients that the market will probably wait until after the Fed’s meeting before pushing the dollar index into 90 and 91 territory.

Riskier currencies lost out on Friday, erasing recent gains. The Australian dollar - which is seen as a liquid proxy for risk appetite - fell by 0.71% to 0.77300 versus the U.S. dollar .

The New Zealand dollar was down 0.97% against the U.S. dollar at 0.7157. The Norwegian crown lost out to both the euro and dollar.

Dollar-yen was up around 0.55%, changing hands at 109.095 , close to the 109.235 reached on Tuesday which had been the yen’s weakest since June 2020.

Elsewhere, bitcoin dipped 2.5% to $56,311.83.11, having come close to, but not exceeded, the recent record high of $58,354.14 .

Reporting by John McCrank in New York; additional reporting by Elizabeth Howcroft in London, editing by Kirsten Donovan and Mark Heinrich

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