FOREX -Dollar pauses after strong gains, euro struggles to hold gains
* Dollar index hovers near two-month peak
* Solid US jobs data keeps alive December tapering view
* Diverging Fed/ECB policy path expected to keep euro subdued
LONDON, Nov 11 (Reuters) - The dollar took a breather on Monday after hefty gains over the previous two sessions, but its broad uptrend was intact on speculation the Federal Reserve may scale back monetary stimulus sooner than expected.
The euro struggled to make much headway as the Fed and the European Central Bank's diverging monetary policy paths prompted investors to sell the single currency at higher levels.
Amid lower-than-usual volumes, the euro was flat at $1.3375 , not that far from a two-month trough of $1.3295 plumbed last Thursday after the European Central Bank surprised the market by cutting its main interest rate to a record low 0.25 percent.
The dollar was flat against the yen at 99 yen while the dollar index shed 0.15 percent to 81.155. It was though still within sight of a two-month high of 81.482 set on Friday after a key U.S. employment report showed employers added 204,000 new jobs last month, soundly beating forecasts for 125,000 jobs.
The strong data was even more surprising as it came in a month when a budget standoff in Washington forced a 16-day government shutdown, suggesting the U.S. economic recovery was on a firmer footing than previously thought.
As a result U.S. yields rose, with the gap between two-year U.S. Treasuries and their German counterparts rising to the highest since mid-July.
The 10-year U.S. yield also rose towards a near two-month high as investors brought forward expectations of when the Fed may start to withdraw stimulus to as soon as next month, all of which underpinned the dollar as rising yields make a currency more attractive to hold.
"The dollar has come off slightly, but the defining factor is the rise in the U.S. yields," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"The dollar will be supported and for the euro any bounce towards $1.34 will be sold into."
Although the ECB's rate-setting committee was split about Thursday's decision to cut rates, Executive Board member Benoit Coeure said on Saturday that the bank could trim interest rates further and provide more liquidity.
Speculators have been cutting long euro positions and this trend is likely to gather pace with the euro zone set to face a prolonged period of falling inflation. That could see the ECB deploying more aggressive monetary easing instruments to support nascent growth.
"We continue to expect a diverging monetary policy outlook to drive euro/dollar lower in the medium term," Barclays Capital analysts said in a note.