* Dollar index hovers near 1-week low
* But recent rises in U.S. yields signal support for dollar
* Support for dollar index at 100-day MA near 79.30
* AUD dips, BHP Billiton sees China iron ore demand flattening
By Masayuki Kitano
SINGAPORE, March 20 (Reuters) - The dollar hovered near a one-week low against a basket of currencies on Tuesday, but recent signs of improvement in the U.S. economy and rising Treasury yields were likely to lend it some support.
The dollar index stood at 79.497, having regained a bit of ground after dipping to 79.354 on Monday, its lowest level since March 9. One possible support level lies roughly around 79.30, its 100-day moving average.
“I don’t expect to see the dollar pull back significantly,” said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
“It’s probably going to be a consolidation week for the dollar.”
The euro held steady at $1.3235, just below a one-week high near $1.3266 hit on Monday.
A trader for a major Japanese bank in Singapore attributed the euro’s rise on Monday to a short squeeze, after the European Central Bank (ECB) said it did not buy any bonds under its bond buying programme last week.
“The market took the news as a sign that bond markets in the euro zone have been recovering on their own, even without such ECB support,” the trader said.
“That triggered some stop-loss buying and the euro was squeezed higher,” he added.
While market players remain mindful of the risk that the euro zone’s sovereign debt crisis could flare up again, and fret that Portugal may eventually need to restructure its debt like Greece, there have been some signs of stabilisation in the euro zone’s bond markets this year.
For example, the yield spread of 10-year Italian government bonds over their German counterparts stood at 248.5 basis points on Tuesday, down from around 535 basis points on Jan. 9.
In the near-term, the euro could be vulnerable against the dollar, given the diverging outlooks for the U.S. and euro zone economies, said Rob Ryan, FX strategist for BNP Paribas in Singapore.
“The (euro‘s) downside is probably a little more vulnerable because of the continued improvement in the U.S. data,” Ryan said.
The Australian dollar slipped 0.3 percent to $1.0578 , coming under a bit of pressure after global miner BHP Billiton said it saw signs that growth in iron ore demand was flattening in China, Australia’s single biggest export market.
A recent improvement in U.S. economic data coupled with a modest brightening of the U.S. Federal Reserve’s economic outlook in its policy statement last week prompted investors to scale back expectations of further monetary easing in the near term, helping spur a rise in U.S. Treasury yields.
The 10-year U.S. Treasury yield rose to as high as 2.392 percent on Monday, its highest level since late October.
Given this backdrop, the dollar looks likely to be supported against the yen as long as forthcoming U.S. economic data doesn’t disappoint, said Ryan at BNP Paribas.
“As long as they come in roughly as expected, then I think that the dollar strength against the yen can be maintained and dollar/yen will continue to drift up,” he said.
The dollar inched up 0.1 percent to 83.43 yen. The dollar has taken a breather after hitting an 11-month high of 84.187 yen on trading platform EBS on Thursday.
The yen has come under broad pressure over the past month after the Bank of Japan’s surprise monetary easing in mid-February.
Trading in the yen is likely to be less active than usual, with Japanese financial markets closed on Tuesday for a national holiday.