* Euro extends gains vs dollar after Greek bond buyback
* Dollar weakens on U.S. fiscal deadlock
* Yen recovers after recent slide
By Wanfeng Zhou
NEW YORK, Dec 4 The euro climbed to a near seven-week high against the dollar on Tuesday after Greece announced better-than-expected terms for its debt buyback, fueling optimism that Athens would continue to receive international aid to avoid a default.
The U.S. dollar weakened to a six-week low against a basket of currencies as uncertainty persisted over whether President Barack Obama and the Congressional Republicans would reach a deal to prevent the U.S. economy from slipping back into a possible recession next year.
Greece said it would spend 10 billion euros to buy back bonds at a price range that topped market expectations. The news helped push Italian and Spanish bond yields lower.
The buyback is part of a deal reached last week by Greece's international lenders to cut its debt and needs to be completed before the IMF can release its share of the aid.
"As far as trading today is concerned, traders seem comfortable being 'long' euro so I would expect the bid tone to remain," said Matthew Lifson, senior analyst and trader at Cambridge Mercantile Group in Princeton, New Jersey.
The euro rose 0.3 percent to $1.3089, having risen as high as $1.3107, the strongest since Oct. 18. Further chart resistance is located at the October high around $1.3140.
"The market is taking a fairly optimistic view that we will see a smooth implementation of these (Greek) plans," said Ian Stannard, head of European FX strategy at Morgan Stanley.
He expected the euro to hold firm until the end of the year but warned it could come under selling pressure in 2013 due to the deterioration in the broader euro zone economy.
Morgan Stanley recommend clients enter a long euro/dollar position at $1.3050, with a target of $1.34.
The dollar index, which tracks the greenback against a basket of six currencies, fell 0.3 percent to 79.674, having reached a six-week low of 79.612.
Worries over efforts to avert the U.S. "fiscal cliff" hobbled the dollar despite its reputation as a refuge in times of uncertainty. Analysts said the dollar had stayed weak because of relatively positive developments in the euro zone.
The White House dismissed Republican proposals for steep spending cuts late on Monday, heightening concern lawmakers will not reach a deal in time to avert $600 billion in automatic budget measures due in early 2013.
"At the moment the market is ... likely expecting a last minute fudge maybe with some delays and some temporary measures to tide them over to next year," Morgan Stanley's Stannard said.
The Swiss franc weakened, extending Monday's fall when Switzerland's largest banks said they would charge for some franc deposits. This pushed the euro to 1.21455 francs on trading platform EBS, its highest since mid-September. The euro was last up 0.4 percent at 1.2135 francs.
The dollar shed 0.4 percent to 81.89 yen, further retreating from a 7-1/2 month high of 82.84 yen hit last month.
The yen has recovered from a recent slide sparked by the prospect of more monetary easing by the Bank of Japan after a Dec. 16 election, with some investors thinking there may be little scope for further falls.
"We saw an incredible amount of yen weakness in November and this is running out of steam simply because we don't see any additional news flows out of Japan," said Ulrich Leuchtmann, head of FX research at Commerzbank.
"People want to wait until the elections are over and see what the new government is really going to do."
The Canadian dollar rose against the U.S. dollar after the Bank of Canada held interest rates steady and kept its rate rise bias. The U.S. dollar fell 0.3 percent at C$0.9921.
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