By Shinichi Saoshiro
TOKYO (Reuters) - The dollar sat near a 7-month high against a basket of currencies on Wednesday as the euro slid on expectations for more monetary easing by the European Central Bank in December.
The greenback treaded water after its advance was halted by an overnight drop in U.S. Treasury yields amid investor demand for safe-haven assets.
The dollar index was little changed at 99.736 after touching 99.745 overnight, its highest since mid April.
The greenback's gains came in large part from the euro's weakness. The common currency was down 0.1 percent at $1.0635 after touching a 7-month trough of $1.0630 overnight, hurt by the potential harm the Paris attacks could do the euro zone economy, and which could require yet more easing by the ECB.
The euro could also face pressure in the longer run with France on a stronger war footing following the assault on its capital.
France is bound to overshoot its European Union budget deficit target as it boosts security spending in the wake of the Nov. 13 attacks, Prime Minister Manuel Valls said on Tuesday.
"Although French government bonds are unlikely to be sold immediately on this - the ECB is a steady buyer of debt - it is still a fiscal issue with negative consequences for the euro in the long run," said Ayako Sera, a senior market economist with Sumitomo Mitsui Trust in Tokyo.
"That said, the ECB's monetary policy firmly remains an immediate concern for the euro," Sera added.
Expectations of further central bank stimulus grew on Tuesday after ECB's chief economist and executive board member Peter Praet told Bloomberg that he was aware of present downside risks and that they may have increased in light of the events in Paris.
"The worst policy mix for a currency is loose monetary and tight fiscal policy. The eurozone is flirting with this combination, even if the region's fiscal straitjacket is not being enforced rigorously. This is part the case for a weaker euro in the quarters ahead," wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
Moreover, latest data further highlighted the monetary policy divergence theme, with a rise in U.S. inflation reinforcing prospects of the Federal Reserve hiking interest rates next month.
The dollar was flat at 123.43 yen after nudging up to a 1-week high of 123.49, its advance stalled by the overnight drop in U.S. debt yields.
Treasury yields declined on Tuesday as worries that more terror acts would follow Friday's attacks in Paris spurred demand for safe-havens. Two-year to 10-year debt yields rebounded on Wednesday, although their rise was too modest and gave little lift to the dollar.
Elsewhere, a fall in dairy prices knocked the New Zealand dollar lower. The kiwi struggled near a 6-week low of $0.6452.
Data out late on Tuesday showed global dairy prices fell for the third consecutive auction, adding to pressures on New Zealand farmers and to the chance that the central bank could cut interest rates at its meeting next month.
The market will sift through the October Fed policy meeting minutes due later in the session for hints on the timing of a possible rate hike. The dollar had surged after the Fed left the door open for a December rate hike at the meeting held late in October.
Housing-related data to be released later in the day will also provide a glimpse into the health of the U.S. economy.
(Reporting by Shinichi Saoshiro; Editing by Eric Meijer & Shri Navaratnam)
