* Dollar bounces as Treasury yields pull back from 2-wk lows
* Yields up after report that Trump favouring a policy hawk
By Shinichi Saoshiro
TOKYO, Oct 17 (Reuters) - The dollar held to gains against the yen and euro on Tuesday, supported by a rise in Treasury yields following a report that U.S. President Donald Trump was favouring a policy hawk as the next head of the Federal Reserve.
Treasury yields bounced from two-week lows and rose on Monday after a report that President Trump was favouring Stanford economist John Taylor, seen as more hawkish than current Chair Janet Yellen, to head the Fed.
“The dollar was under pressure as Treasury yields declined last week. But it was allowed to rebound as a stronger Wall Street, good U.S. data and the report about Taylor all came into place to stop the yield decline,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.
The New York Fed’s business conditions index published on Monday showed its highest reading since September 2014.
“The euro likely holds the key to whether the dollar can remain firm. The European Central Bank is now considered less hawkish than the market had initially thought last month, pushing German bund yields lower and in turn favouring the dollar against the euro,” Ishikawa at IG Securities said.
Ten-year bond yields in Germany hit one-month lows overnight, extending moves seen late last week on reports that ECB policymakers broadly agree on extending asset purchases at a lower volume at their Oct. 26 meeting with views converging on a nine-month extension.
The greenback was 0.05 percent higher at 112.240 yen after rising 0.3 percent overnight, when it pulled away from a three-week low of 111.650.
The euro dipped 0.1 percent to $1.1787 after losing 0.25 percent the previous day.
The dollar index against a basket of six major currencies stood little changed at 93.299 after rising 0.25 percent overnight.
The index had stooped to a 17-day low of 92.749 on Friday in the wake of disappointing U.S. inflation data.
The Australian dollar was 0.05 percent lower at $0.7845 as its rally last week to a two-week high of $0.7898 on upbeat Chinese data lost momentum. (Reporting by Shinichi Saoshiro; Editing by Eric Meijer)