* Prospect of Fed stimulus winding down boosts dollar
* Euro holds above chart support after German Ifo
* China worries push Australian dollar to 33-month low
By Gertrude Chavez-Dreyfuss and Nick Olivari
NEW YORK June 24 (Reuters) - The U.S. dollar on Monday rallied to its highest in nearly three weeks against a basket of currencies on rising expectations U.S. monetary stimulus will be scaled back in the near term.
The shift in sentiment has prompted investors to unwind bets that the Federal Reserve was not ready to end its bond-buying program, known as quantitative easing. The unwinding, however, could take months.
The dollar has gained across all major currencies since Fed Chairman Ben Bernanke said last Wednesday that the U.S. central bank could taper its monthly $85 billion in asset purchases if the economy continues to improve. U.S. bonds and stocks have sold off since the Fed announcement.
“The optimism by the Fed fell in sharp contrast to other prominent central banks, such as the Bank of Japan, Bank of England, European Central Bank, and Reserve Bank of Australia, which are seeking measures to thwart a further economic slowdown to their respective jurisdictions,” said Ravi Bharadwaj, market analyst at Western Union Business Solutions in Washington.
In late trading, the dollar index was up 0.1 percent at 82.405 after rising as far as 82.841, its highest since June 5. The gains added to last week’s 2.2 percent rally, its biggest weekly rise since November 2011.
Bernanke’s comments have helped push up the benchmark 10-year U.S. Treasury note’s yield to its highest in almost two years on Monday with interest rate differentials moving in favor of the dollar. U.S. 10-year yields were at 2.568 percent in late afternoon trading.
The dollar came off their highs, however, after the Dallas Fed President Richard Fisher said on Monday an exit from monetary easing “is way out in the future.”
“Given stretched valuations of depreciated risk currencies, buying the dollar, yen, and Swiss franc - the safe havens - against them at current levels could backfire if pricing caused by more hawkish Fed expectations is not validated by actual Fed policy,” said Dan Dorrow, head of research at FX broker Faros Trading, in Stamford, Connecticut.
The dollar shifted between gains and losses against the yen, but sold off in the New York session as investors considered that the recent five-day advance had gone too far, too fast. It had risen earlier against the Japanese currency after Bank of Japan Deputy Governor Kikuo Iwata said the central bank still has options for monetary easing, if need be.
In late afternoon trading, the dollar was down 0.2 percent at 97.67 yen, below an earlier peak of 98.70, its highest since June 11.
Changes in the price of the dollar against the yen were mostly in response to moves in European stocks. After investors digested comments from the BoJ’s Iwata, the dollar surrendered gains as investors traded on other factors.
Iwata, a vocal advocate of reflationary policies, said if the BoJ were to boost asset purchases in the future, he would favor government bonds over risky assets, given the size of the vast market for Japanese government bonds, or JGBs.
The euro also fell 0.2 percent to 128.19 yen.
The dollar’s gains against the euro, meanwhile, were tempered by a survey showing a small increase in German business morale, which helped keep the single currency above key chart support. The euro was last little changed at $1.3118.
Rate differentials between 10-year Treasury notes and similarly-dated German Bunds have moved in favor of the former, with spreads at their highest since April 2010.
Analysts at Morgan Stanley, who recently recommended selling the euro with a target of $1.28, have lowered their entry level for the trade to $1.3180. A sustained break below the 200-day moving average, currently at $1.3072, would be a bearish signal, they said.
Volume picked up in the New York session, with $3.7 billion in euros changing hands globally by late afternoon trading, using Reuters Dealing data. Some $2.4 billion in yen traded.
The higher-yielding Australian dollar, which is sensitive to concerns about growth in China, recovered from an earlier 33-month low. The Australian dollar was last up 0.5 percent at US$0.9260 after falling as low as $0.9145.
A recent spike in interbank borrowing costs have raised fears that stress in China’s banking system could weigh on already slowing growth.