FOREX-Dollar rises to 10-1/2-month peak, lifted by Treasury yield surge

* Euro falls to six-week low vs dollar * Japan's yen falls versus dollar, euro * British pound down sharply (Adds new comment, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Sept 28 (Reuters) - The U.S. dollar surged to its highest in more than 10 months on Tuesday, tracking the rise in Treasury yields, as investors looked ahead to the Federal Reserve possibly reducing asset purchases in November and an interest rate hike likely to follow. On Tuesday, benchmark 10-year Treasury yields hit a three-month peak, and were last up four basis points at 1.5253%. The rise in yields accelerated after the U.S. central bank turned hawkish at last week's monetary policy meeting, reinforcing the market view for a sooner-than-expected Fed taper. "Yields are generally moving higher as rising inflation expectations weigh on the relative attractiveness of government bonds, but are climbing even faster in the United States as traders bet the Federal Reserve will move more quickly than its global counterparts," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. "Rate differentials are tilting toward the dollar, weakening low-yielders and putting pressure on economies with significant borrowing needs." In afternoon trading in New York, the U.S. dollar index reached its highest level since early November and was last up 0.3% at 93.719. Risk aversion exacerbated the currency market moves, said Neil Jones, head of FX sales at Mizuho, with Wall Street shares down. The Australian dollar, which is seen as a liquid proxy for risk appetite, dropped 0.6% at US$0.7240. The euro was down 0.1% versus the dollar at $1.1681. Earlier in the session, it hit a six-week low of $1.1668, after comments from U.S. Treasury Secretary Janet Yellen, saying that U.S. inflation at the end of the year would be closer to 4%, double the Fed target. "One theme that seems to be gaining traction is that the market lies on the cusp of reassessing the path for the Fed tightening cycle," ING strategists wrote in a note to clients. "A big move higher in the short-end is the key reason why we are bullish on the dollar, particularly from 2Q next year, but we will closely monitor and reassess whether that move needs to come earlier - largely a function of timing the take-off in short-end rates." The Japanese yen weakened to its lowest level in nearly three months against the dollar. The greenback was last up 0.5% at 111.57 yen.. The yen is the G10 currency most correlated with U.S. two-year and 10-year Treasury yields, MUFG currency analyst Lee Hardman said in a note to clients. Minutes from the Bank of Japan's July meeting showed that some central bank policymakers warned of the risk of a delay in the country's economic recovery. The British pound, meanwhile, was down 1.2% at $1.3532. The currency jumped last week after a hawkish tone by the Bank of England, but analysts struck a cautious note on the currency as Britain struggled with supply chain chaos due to a shortage of truck drivers. ======================================================== Currency bid prices at 3:02 PM (1902 GMT) Description RIC Last U.S. Pct Change YTD Pct High Bid Low Bid Close Change Previou s Session Dollar index 93.7590 93.4110 +0.39% 4.199% +93.8050 +93.3600 Euro/Dollar Dollar/Yen 0 0 Euro/Yen 0 0 Dollar/Swiss Sterling/Dol $1.3531 $1.3706 -1.25% -0.94% +$1.3717 +$1.3522 lar Dollar/Canad 1.2676 1.2629 +0.36% -0.47% +1.2707 +1.2594 ian Aussie/Dolla $0.7238 $0.7287 -0.66% -5.90% +$0.7311 +$0.7226 r Euro/Swiss Euro/Sterlin NZ $0.6954 $0.7014 -0.86% -3.17% +$0.7026 +$0.6943 Dollar/Dolla r Dollar/Norwa 8.6650 8.6010 +0.80% +0.97% +8.6815 +8.5990 y Euro/Norway Dollar/Swede 8.7361 8.7079 +0.21% +6.58% +8.7499 +8.6971 n Euro/Sweden (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Elizabeth Howcroft in London; Editing by Bernadette Baum, Susan Fenton and Mark Heinrich)