* Dollar index rises to two-and-a-half week highs
* Fed's stimulus-withdrawal plan drives US yields up
* Traders warily watch Chinese money markets
By Lisa Twaronite
TOKYO, June 24 (Reuters) - The dollar mounted a two-and-a-half week peak against a basket of major currencies and surged against its Japanese counterpart in Asia on Monday, as expectations of scaled-back U.S. monetary stimulus pushed up yields on U.S. sovereign debt.
Federal Reserve Chairman Ben Bernanke said last Wednesday that the U.S. central bank could taper its monthly $85 billion in asset purchases later this year if the economy continues to improve as it expected. The Fed chief's remarks helped push up the benchmark 10-year U.S. Treasury yield, which touched its highest in almost two years in Asia on Monday.
That in turn lifted the dollar index, which added 0.4 percent to 82.661 after rising as high as 82.692, its highest since June 5. The gains built on last week's 2.2 percent rally, its biggest weekly rise in 19 months.
"The higher Treasury yields lead to a stronger dollar, of course," said Masashi Murata, senior currency strategist at Brown Brothers Harriman.
But higher U.S. yields could lead to risks of their own, as they threaten to weigh on lending and sap growth, Murata said, adding that the yen could be bought back on such concerns, and the dollar will likely be capped ahead of the 99-yen level for now.
The good news for the greenback has been bad news for emerging market assets and commodity currencies, which had benefited most from the Fed's liquidity injection.
"We see little relief this week to the pain inflicted on markets from tapering fears," Mitul Kotecha, the global head of foreign-exchange strategy in Hong Kong at Credit Agricole, wrote in a research note.
On top of concerns about the impact of the Fed's exit plan, a recent spike in interbank borrowing costs had raised fears that stress in China's banking system could weigh on already slowing growth.
"Weaker growth and funding concerns in China added another layer of uncertainty to the market psyche although comments from China's central bank the PBoC about 'fine tuning' may help to allay fears of a wider credit crunch," Kotecha said.
Persistent fears of tighter Chinese credit weighed on regional equities markets on Monday, even as short-term interest rates fell and the central bank said there were sufficient funds in the market but banks needed to improve their cash management and control their lending.
Against the yen, the dollar put on 0.7 percent to 98.49 yen after earlier touching 98.72 on the EBS trading platform, its highest since June 11.
Diverging monetary policy outlooks between the Fed and Bank of Japan could push the spread wider between yields on Treasuries and Japanese government bonds and in turn fuel further dollar gains, some strategists and market participants say.
"The focus is on U.S. interest rates. We see Japanese real-money investors mostly waiting on the sidelines, and its mostly overseas hedge funds that are taking the dollar higher today," said an advisor at a foreign exchange market research firm in Tokyo.
The euro fell 0.2 percent to $1.3097 after dropping as low as $1.3085, a level not seen since June 6.
The common currency has given back about 50 percent of its mid-May to mid-June rally, bringing in focus support at $1.3034, which represents the 61.8 percent retracement of that advance.
The Australian dollar remained under pressure, down 0.4 percent at $0.9182 after falling as low as $0.9170, not far from its 33-month low of $0.9160 struck last week.
The Aussie is the biggest underperformer in the dollar bloc, given the added worry of slowing growth in China, Australia's single largest export market.
JPMorgan now has a year-end target of $0.9000 for the Australian dollar, compared to its previous expectations of parity, reflecting disappointing Chinese data since late March and an outlook for higher U.S. Treasury yields.