FOREX-Dollar rises to 3-week peak vs yen; ECB's Nowotny lifts euro
* Elevated U.S. bond yields help dollar
* Gap between 2-year US/Japan bond yield at 1-1/2 year high
* Euro hits 1-month high versus yen, Nowotny's comments help
NEW YORK, Aug 23 (Reuters) - The dollar rose against a basket of currencies on Friday, climbing to a three-week peak versus the yen on Friday, helped by the rise in U.S. bond yields this week on expectations the Federal Reserve will reduce its asset-buying program next month. The euro, meanwhile, rose against most currencies in the wake of comments by European Central Bank policymaker Ewald Nowotny, who said he did not see much reason for the ECB to cut interest rates. He spoke after surveys showed euro zone activity picking up at a faster pace. The dollar rose 0.3 percent to 99.02 yen, having hit a three-week high of 99.15 yen on the Reuters trading platform. The gap between two-year U.S. Treasury yields and their Japanese counterparts moved to its widest since March 2012 and should encourage more Japanese investors into U.S. Treasuries, analysts said. Against a basket of six major currencies, the dollar was up 0.1 percent at 81.579. Sebastien Galy, currency strategist at Societe Generale in New York said "there has been a tick-by-tick correlation between dollar/yen and U.S. bond yields, which has certainly supported that pair." The yield on the U.S. 10-year note was 2.8920 percent on Friday, not far from the two-year high of 2.9360 percent hit on Thursday. Barclays Capital is forecasting 10-year U.S. yields to rise to 3.75 percent by the end of the third quarter of 2014. Galy said the market consensus right now is for a Fed tapering in September and a reduction of about $20 billion. But Galy said Societe Generale expects the Fed to go slow and start with a $10 billion reduction in asset purchases. "There is no be reason to be aggressive at the beginning of tapering. It makes more sense to wait it out and see the impact on the market," said Galy. The euro was little changed against the dollar at $1.3353 , but was well-bid against other major currencies. Europe's common currency was up 0.2 percent against the yen at 132.15, after touching a one-month high of 132.42. It rose 0.2 percent against the Swiss franc to 1.2352 francs and drifted up 0.1 percent versus sterling at 85.82 pence. "The euro seems irrepressible at the moment, but we think the Fed normalisation story will win out for the dollar," said Chris Turner, head of currency strategy at ING. The euro had set a six-month high of $1.3453 earlier this week, supported by a recent improvement in euro zone economic data. A second reading of German gross domestic product data confirmed that Europe's biggest economy grew by 0.7 percent in the second quarter, helped by domestic demand. The recent pick-up has pushed euro zone money market rates higher and if sustained is likely to challenge the effectiveness of the ECB's pledge to keep rates low until a full-fledged recovery is in place. Also, as the Jackson Hole symposium kicked off, the focus will be on influential Federal Reserve Vice Chair and policy dove Janet Yellen, who is scheduled to speak on Saturday.