Dollar advances after Yellen comments on rate hike

By Sam Forgione and Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The U.S. dollar hit its highest against the euro in more than seven months on Wednesday after Federal Reserve Chair Janet Yellen hinted at a nearing rate hike, but the greenback pared gains on profit-taking and reduced risk appetite.

Yellen said she was "looking forward" to a U.S. interest rate hike that will be seen as a testament to the economy's recovery from recession. Speaking at the Economic Club of Washington, she added that holding rates at zero for too long could pose a risk to financial stability.

While the comments sent the euro to $1.05500, its lowest level against the greenback since mid-April, the euro later pared its losses after reduced risk appetite and profit-taking led traders to trim dollar bets. The euro was last down 0.14 percent against the dollar at $1.06185.

The dollar index, which measures the greenback against a basket of six major currencies, hit its highest level since April 2003 of 100.510 after the Yellen remarks, but also pared its gains and was last up just 0.19 percent at 99.980.

"The dollar bumped up against some technical resistance against the euro, which resulted in a little bit of profit-taking and squaring positions ahead of tomorrow's ECB governing council meeting and also Friday's payrolls," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The dollar remained slightly higher against the euro at the end of the U.S. trading session given the Yellen comments, data showing U.S. private employers added a larger-than-expected 217,000 jobs in November, and the likelihood of the ECB cutting rates deeper into negative territory when it meets on Thursday, analysts said.

"We would probably be much higher in the euro versus the dollar if not for the fact that Yellen came out, U.S. numbers were strong, and we've got the ECB tomorrow. We'd probably be closer to $1.07 now," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago.

The dollar, which hit a two-week high against the yen of 123.680 yen after the Yellen comments, also pared its gains against the Japanese currency but remained up 0.27 percent at 123.210 yen .

Analysts said an uptick in U.S. Treasury yields on Wednesday led traders to favour the dollar over the yen given higher yields in the United States compared to Japanese debt.

(Reporting by Sam Forgione and Gertrude Chavez-Dreyfuss; Editing by Andrew Hay and Chizu Nomiyama)