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* Dollar advances again towards highest since January
* Euro bulls cut long positions from record levels - data
* Dollar's correlation with rates returns as trade tensions ease
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tommy Wilkes
LONDON, April 30 (Reuters) - The dollar rose on Monday and held just below its strongest level since mid-January, with weaker-than-expected German retail sales knocking euro zone sentiment as investor appetite for the greenback improves.
After weakening at the start of 2018, a rise in U.S. Treasury yields have helped the dollar stage a recovery in the past fortnight at the same time as doubts grow about when the European Central Bank (ECB) will tighten monetary policy.
U.S. consumer spending numbers, due out of the U.S. later on Monday along with the Federal Reserve's monetary policy meeting and a crucial jobs report scheduled for later in the week, could help the dollar rally further, analysts said.
"With U.S. yields meandering around the 3 percent mark, in the near term the dollar can definitely rise further," Societe Generale FX strategist Alvin Tan said. "That said, we think longer term the euro can move higher."
The 10-year U.S. Treasury yield hurdled 3 percent last week and remains close to that level, encouraging investors to buy the dollar.
Positioning data shows that net long euro positions by speculators fell last week, albeit it from a record high, suggesting investors remain overwhelmingly bullish on the single currency but are reducing those bets.
The dollar's index rose 0.3 percent to 91.780, down from Friday's high of 91.986, its strongest level since Jan. 11.
The dollar last week enjoyed its biggest weekly gain in more than two months, and the U.S. currency began this week on a strong footing.
German monthly retail sales unexpectedly dropped in March, dampening cheer around a consumer-led upswing in Europe's biggest economy. Regional data showed annual inflation in four German states steady in April, suggesting price pressures in Europe's largest economy are stable.
The euro dropped 0.4 percent to $1.2088, not far from its three-month lows last week of $1.2110.
The correlation between U.S. yields and the dollar had broken down earlier this year as investors focused more on trade frictions and geopolitical issues.
But markets have recently turned their attention back to interest rate plays as concerns over the U.S.-China trade dispute and tensions over North Korea's nuclear programme calmed, giving the greenback a leg up.
Positive earnings from U.S. technology firms and marquee M&A deals have also helped sentiment into this week.
"Even if the rate expectations for the euro zone have recently eased they remain too high in our view. We expect a further downside correction over the course of the year, which is likely to put pressure on the euro in the end," Commerzbank analysts said.
Elsewhere, the dollar rose versus the Japanese currency, up 0.2 percent to 109.25 yen, having set a 2-1/2 month high of 109.54 yen on Friday. Trading was thin with Japanese markets closed for a holiday.
Sterling tumbled further, hitting a low of $1.3715, as the dollar gained and investors further trimmed expectations that the Bank of England would raise rates next month following weak first-quarter GDP data published last week.
The U.S. currency also gained versus the Canadian and Australian dollars, the latter down half a percent and close to its 4-1/2 month low reached last week.