* Dollar rises on U.S. yields, euro falls
* Investors focus on ECB meeting
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Adds quotes, context, updates figures)
By Tom Finn
LONDON, April 25 (Reuters) - The dollar hit a four-month high on Wednesday after a rise in benchmark U.S. Treasury yields above 3 percent rattled some currency bears and led investors to consider whether the greenback was breaking out of a prolonged weak spell.
The U.S. 10-year treasury yield has risen to its highest in more than four years, driven by worries about the growing supply of government debt and inflationary pressures from rising oil prices.
That has caused U.S.-Japan and U.S.-German yield differentials to widen further in the dollar’s favour, leaving the yen and the euro lower.
The dollar’s performance against a basket of major currencies rose to as high as 91.117 in early London trade, its strongest level since Jan. 12. The dollar index last stood at 91.130, up 0.4 percent on the day.
Analysts on Wednesday saw signs the dollar could be breaking higher after months of relative weakness.
“With the impact on risk appetite of a continued tightening of Fed policy and the possibility that the pace of growth in many countries may moderate... there is evidence to suggest the dollar could strengthen,” said Rabobank FX strategist Jane Foley in a note.
But other analysts said net long dollar positions had not risen significantly in recent weeks, despite trade tensions waning.
U.S. first-quarter gross domestic product data due on Friday could determine whether the dollar extends its gains further.
In January, U.S. Treasury Secretary Steven Mnuchin said a lower greenback was “good for us” in a break from previous White House administrations’ public stance for a stronger U.S. currency.
A weak dollar is seen helping U.S. exporters to compete abroad but could undermine the greenback’s status as the world’s top reserve currency.
The dollar’s gains on Wednesday drove the euro down past the two-month low hit on Tuesday because of concerns that firmer U.S. yields would reduce demand for the region’s bonds at a time when hedge funds have amassed record long euro bets.
Investors are focused on whether a European Central Bank monetary policy meeting on Thursday will see the euro-dollar exchange rate break out of its recent tight range.
Analysts say the market needs clarity about the speed of the ECB’s monetary tightening cycle before the euro, which rallied at the start of this year before running out of steam in the last two months, breaks higher.
In early 2018 traders bet that synchronised global growth would force the ECB to accelerate monetary policy normalisation.
But the ECB’s reluctance so far to signal any shift leaves the “euro’s gains against the dollar vulnerable to setbacks”, said Commerzbank analyst Thu Lan Nguyen in a note.
Nguyen said the euro-dollar exchange rate continues to be dominated mainly by moves in the U.S. dollar.
The rise in bond yields also weakened Asian emerging market currencies versus the dollar on Wednesday, with the Chinese yuan down and the Indonesian rupiah trading near a two-year low of 13,895 per dollar.
Against the yen, the dollar hit a two-month high of 109.270 yen.
Easing concerns over global political risks weighed on the Japanese currency, market participants said, as the yen tends to attract demand in times of economic uncertainty and market turmoil, and sell off when confidence returns. (Editing by Gareth Jones)