* Dollar propped up by rise in Treasury yields
* Euro holds onto most of gains since French vote
* Sterling helped by bullish manufacturing survey
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, May 2 (Reuters) - The dollar hit a six-week high against the yen on Tuesday, lifted by a surge in U.S. government bond yields after U.S. Treasury Secretary Steven Mnuchin commented on the possibility of ultra long-term bond issuance.
With European markets returning after May Day holidays, the greenback gained around a third of a percent to trade as high as 112.31 yen, its strongest since mid-March.
Mnuchin told Bloomberg in an interview on Monday that issuing debt exceeding 30-years in maturity “can absolutely make sense”, driving 30-year yields to a three-week high and returns on 10-year bonds to a session peak.
The euro, however, held strong against the greenback, some measure of market doubts over whether the Trump administration is capable of delivering a promised boost to growth, chiefly now envisaged to come through tax cuts.
“Mnuchin’s comments have at least stabilised the long end of the curve,” said Lee Hardman, an analyst with Japan’s MUFG.
“But the dollar is still on the defensive in the near term. The data from the U.S. has been coming in on the disappointing side and the Fed is likely to acknowledge that ... this week.”
The “Trumpflation” trades that dominated the end of last year, driving Treasury yields and the dollar higher on expectations of higher inflation, growth and official interest rates, have faded this year.
The dollar is down almost 4 percent against the euro in the first four months of 2017 and was less than half a cent off last week’s 5-1/2 month low of $1.0951 on Tuesday.
Latest U.S. economic indicators have been underwhelming. Factory activity slowed in April, while consumer spending was unchanged in March, and an important inflation measure fell on a monthly basis for the first time since 2001.
Other numbers out later this week include an ADP employment report on Wednesday, durable goods orders on Thursday and a non-farm jobs report on Friday.
The Fed is widely expected to keep interest rates unchanged at a two-day policy meeting that begins on Tuesday, but its attitude to the recent data will be crucial for market expectations of another rise in interest rates in June.
Alessio de Longis, a portfolio manager at Oppenheimer Funds in New York, said there was not enough progress on a fiscal boost that might drive the dollar higher although he had not yet turned outright positive on the euro.
“Neither one of these two (growth) stories is ripe right now and really dominant, so that’s why the euro is struggling to find a clear direction and is stuck between $1.05 and $1.10,” he said.
“We have been underweight the euro for years and went neutral literally on Sunday night after the French elections results and plan to hold this position.”
Sterling, one of the past month’s strongest performers in currency markets globally, gained 0.2 percent to $1.2912 after a survey of purchasing managers pointed to a stronger manufacturing sector thanks to the weaker pound.
That countered any nerves over reports of a fractious meeting between Prime Minister Theresa May and European Union officials last week which bode ill for Brexit talks this year.
Nomura analyst Jordan Rochester argued there was a risk of the economy surprising on the upside as European growth strengthened, turning the Bank of England less pessimistic and reheating expectations of higher interest rates.
“The difficulty of the early stages of the Brexit negotiations looks to be priced in already. The market learnt nothing particularly new from the weekend’s dinner leaks,” he said.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Tom Heneghan and Ed Osmond