FOREX-Dollar bounces across the board as U.S. bond yields rise

* U.S. 10-year Treasury yield approaches 3 percent

* Euro, down half a percent, faces big week with ECB meeting

* Dollar helped by bond yields, North Korea promise on peace

* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, April 23 (Reuters) - The U.S. dollar rallied to a seven-week high on Monday after a rise in the 10-year U.S. Treasury yield to within a whisker of the psychologically important 3-percent level prompted buying of the greenback, leaving the euro and yen sharply lower.

Rising U.S. bond yields have not always fed through to a higher dollar in 2018 as U.S. political uncertainty and geopolitical tensions have sometimes caused a breakdown between interest rates and currency performance.

But with the 10-year Treasury yield closing in on 3 percent and the gap between U.S. and German government bond rates at a 29-year high, the dollar was bought across the board.

Analysts and investors say that should Treasury yields push past 3 percent, that would signal the start of a bear mearket for bonds and produce levels which have triggered market spasms in the past.

"Finally rising U.S. yields are having at least some effect on the dollar. Investors could not ignore this indefinitely," Commerzbank (Xetra: CBK100 - news) currencies strategist Ulrich Leuchtmann said.

"If you believe that the Fed (Federal Reserve) will do what it has done for the last 30 to 40 years, then you will have to come to the conclusion that this will be positive for the dollar," he said, predicting that the U.S. central bank would tighten policy further to curb inflation.

The rise in yields was spurred by worries about further inflationary pressures, but also by increases in U.S. debt issuance, signs of a thawing of relations between the United (Shenzhen: 000925.SZ - news) States and China, and North Korea promising to suspend nuclear missile tests and instead pursue peace.

Against a basket of currencies the dollar index rose 0.5 percent to 90.728, its highest level since March 1.

The euro fell half a percent to a 2-1/2 week low of $1.2226 , not helped by a survey showing business activity in April stabilising across the euro zone.

The euro had enjoyed a strong rally until February before finding itself stuck in a trading range with the dollar after the European Central Bank cautioned investors expecting it to raise rates sooner than expected.

Not all analysts are convinced the greenback can sustainably strengthen much from here, and many still back the euro to gain once there is clarity about euro zone monetary policy.

"There is a little bit of a notion that the ECB could sound a bit more cautious. We don't think so. We think that the ECB will keep its policy normalisation stable," Credit Agricole FX strategist Manuel Oliveri said. He predicted the euro-dollar exchange rate would remain stuck in its recent range and noted that recent positioning data suggested investors were not bullish on the dollar.

The ECB holds its monetary policy meeting on Thursday.

ASIAN CURRENCIES SLIDE

The rise in bond yields also weakened Asian emerging market currencies versus the dollar, with the Chinese yuan and Korean won down and the Indonesian rupiah hitting a two-year low of 13,895 per dollar.

The Australian dollar skidded to its weakest since Dec (Shanghai: 600875.SS - news) . 14, falling to as low as $0.7634 before recovering slightly to $0.7643, while sterling and the Canadian and New (KOSDAQ: 160550.KQ - news) Zealand dollars also dropped.

The yen slumped 0.6 percent to 108.28 yen per dollar, its weakest since Feb. 13.

Easing concerns over global political risks weighed on the Japanese currency, market participants said, as the yen tends to attract demand in times of market uncertainty and weaken when confidence returns.

North Korea said on Saturday (Shenzhen: 002291.SZ - news) it would immediately suspend nuclear and missile tests, scrap its nuclear test site and pursue economic growth and peace instead. It made these comments ahead of planned summits with South Korea and the United States.

U.S. Treasury Secretary Steven Mnuchin said he may travel to China, a move that could ease tensions between the world's two largest economies. (Editing by Louise Ireland)