* Euro hits three-week high but gives up gains
* Investors see rise in U.S. yields as overdone
* FOMC expected to stick with QE mantra
* Australian dollar breaks parity with greenback
(Updates prices, adds detail, comment)
By Steven C. Johnson
NEW YORK, Dec 14 (Reuters) - The euro retreated from a
three-week high against the dollar on Tuesday as data showing
U.S. retail sales rose by more than forecast last month,
boosting bond yields and optimism about the U.S. economy.
The data, coupled with U.S. President Barack Obama's deal
last week to extend tax cuts for all earners, left traders on
alert to see if the Federal Reserve gives any hint at its
Tuesday meeting of altering a $600 billion bond-buying program
designed to push long-term interest rates lower.
"The Fed could be interesting depending on how vocal they
are in either committing to the full amount now that they've
got additional fiscal stimulus or whether they feel they have
to step on the gas to get rates back down," said Brian Dolan,
chief strategist at Forex.com in Bedminster, New Jersey.
The euro, which began the week at $1.32, hit a three-week
high near $1.35 overnight after rising above the 38.2 percent
retracement of its November decline. It was last at $1.3389
<EUR=>, little changed on the day. Dolan said a close above
$1.3450 could set up a near-term rally to $1.37.
The euro "may have room to run higher if the Fed reasserts
its commitment to purchasing $600 billion, citing the weakness
in inflation and spare capacity weighing on unemployment,"
Brown Brothers Harriman strategist said in a note to clients.
For more on retail sales and the Fed meeting, see
[] and [].
Elsewhere, the Australian dollar <AUD=> hit a one-month
high above parity with the greenback as oil prices rose, but
then eased, while the dollar rose 0.2 percent to 83.55 yen
<JPY=>.
Traders also said year-end positioning and low trading
volume was exaggerating some price swings.
U.S. YIELDS STILL IN FOCUS
The tax cut deal has prompted economists to upgrade their
U.S. growth forecasts, but it also pushed up bond yields for
fear it will swell the deficit.
The dollar rose with yields last week but fell on Monday
when Moody's warned the tax cuts could move it a step closer to
cutting the U.S. triple-A credit rating. []
Some strategists said fear of imminent U.S. inflation and
higher long-term rates was premature.
"The recent rise in front-end U.S. yields looks overdone as
core inflation isn't going to pick up quickly," said Gavin
Friend, currency strategist at nabCapital.
"Also euro zone bond spreads seem to have stabilized on the
back of the recent ECB buying, which has helped the euro."
The European Central Bank stepped up its purchases of
government bonds last week, although the amount bought was
still well below levels reached last spring.
The euro also hit a three-week high against the yen
<EURJPY=R>, shrugging off the weaker-than-forecast current
conditions element of the German ZEW survey. []
But it pared gains after the S&P rating agency said Belgian
sovereign debt could be downgraded within six months, sparking
fear of contagion from the euro zone crisis. []
(Additional reporting by Neal Armstrong in London; Editing by
Andrea Ricci)
