* BOJ widely seen easing at next week's meeting
* Euro falls as Spain bailout uncertainty continues to weigh
* U.S. third-quarter GDP eyed
* Sterling outperforms on strong UK GDP data
NEW YORK, Oct 25 (Reuters) - The dollar climbed to a four-month peak against the yen on Thursday, boosted by a rise in Treasury yields and expectations the Bank of Japan will ease monetary policy next week, although the greenback's rally could fade given its recent gains The dollar has gained 3 percent versus the yen so far in October, its strongest monthly performance since February. Investors expect that the BoJ will take action on Tuesday to stimulate the Japanese economy. U.S. benchmark Treasury yields touched a five-week high a day after the Federal Reserve stuck to its monetary policy, prompting some bond market investors to book profits.
The dollar/yen pair has become more sensitive to movements in U.S. bond yields because both low-yielding currencies compete as the market's favored funding unit in carry trades. Investors tend to sell a low-yielding currency in order to purchase a higher-yielding unit. A rise in U.S. bond yields is making the cost of carry in the dollar more expensive, prompting investors to use the yen as a funding currency. ``Recently higher yields in U.S Treasuries have been feeding the better tone in dollar/yen,'' said Jane Foley, senior FX strategist at Rabobank in London. But she doubted whether the dollar could rise further versus the Japanese currency. ``If tensions were to rise again in the euro zone, it would be very hard for the Japanese authorities to fight against the tide of safe-haven yen demand,'' Foley said. The dollar hit a peak of 80.34 yen, its highest since June 25. That came despite reported heavy offers just above 80 yen, and traders said further gains could take it toward the late-June peak of 80.59 yen. It last traded at 80.32, up 0.7 percent on the day. The Fed last month launched a third round of bond-buying, known as quantitative easing. There are high expectations that the BoJ will expand the total size of its asset purchase program next week, with some speculating the size at 10 trillion yen ($124.74 billion). If the speculation holds true, the increased size of the bond buying would be same amount announced by Japan's central bank in September and would mark a second straight month of policy easing. BNP currency strategist Kiran Kowshik has recommended selling the dollar at 80.60 yen, with a target of 78.00 yen. He said too much emphasis has been placed on Japan's weakening trade picture. ``Japan has about the largest net foreign asset position on the planet, so the income account will remain in surplus, ensuring an overall current account surplus.'' The euro last traded at 103.95 yen, up 0.4 percent on the day, but below a 5-1/2-month peak of 104.59 yen hit earlier this week.
UPBEAT U.S DATA A string of U.S. data mostly favored the dollar. Recent upbeat data has highlighted a growing economic disparity between the U.S. economy compared with Japan and the euro zone. For instance, U.S. new orders for long-lasting manufactured goods increased during September. Other data showed a decrease in the number of Americans filing new claims for unemployment benefits last week.. Looking ahead, price action for the dollar on Friday could be swayed by the first reading of third-quarter U.S. gross domestic product, forecast at 1.7 percent growth, according to a recent Reuters poll. The euro fell 0.3 percent against the dollar to $1.2936 , declining for a third straight session. The euro's upside is widely seen as limited as long as uncertainty persists about whether Spain, the euro zone's fourth largest economy, will seek a bailout. The euro hit a one-week low of $1.2918 on Wednesday on weak German business activity and sentiment data. The British pound outperformed after third-quarter GDP figures showed the economy emerged from recession, lessening the chances of more monetary easing next month by the Bank of England. Sterling rose to one-week high of $1.6144, although economists say one-off factors related to the London Olympic games may mask underlying weakness and the negative influence of the euro zone crisis. It was last at $1.6123, up 0.5 percent.