FOREX-Dollar on defensive after U.S. yields fall

* Dollar sags broadly, hits lows vs yen, Aussie
 
* Traders look to U.S. yields for direction in thin market
* Euro zone debt woes could come back to haunt euro

TOKYO, Dec 30 (Reuters) - The dollar weakened on Thursday, hitting a seven-week low against the yen and a 28-year low against the Australian currency after traders took falls in U.S. bond yields as a cue to sell it.

U.S. Treasuries recovered on Wednesday, pushing yields sharply lower, after a $29 billion auction of seven-year notes drew surprisingly strong demand a day after a weak five-year sale. [ID:nN29284358]
The dollar slipped to 81.40 yen JPY=, its lowest in seven weeks and edging closer to a 15-year low of 80.21 yen hit in November.

As thin trading due to the New Year's holiday tends to exaggerate currency moves, market players say there is risk of the dollar falling near the November low or even to its postwar low of 79.75 yen marked in 1995.
Data on U.S. initial jobless claims later in the day and more importantly U.S. manufacturing data due on Monday could provide the impetus to push the dollar down, they said.

Keiji Matsumoto, a strategist at Nikko Cordial Securities, also said a rise in the Chinese yuan after China's rate hike last Saturday is supporting Asian currencies, including the yen.
The yuan has risen near a record high as Chinese central bank has fixed its mid-point near the high for the past two days.

"There will be speculation that China may engineer a higher yuan ahead of Chinese President Hu Jintao's state visit to the United States next month," he said. Hu will visit Washington on Jan. 19. [ID:nTOE6BM01F]
The euro stayed near Wednesday's high, changing hands at $1.3227 EUR=, which corresponds to a 38.2 percent retracement of its fall from $1.35 to $1.3055 earlier this month.

The currency's stubborn refusal to break below the 200-day moving average, now at $1.3086, has frustrated bearish investors who think the euro-zone debt crisis could spread to Spain and Portugal in early 2011.
On the upside, it could target $1.3275-80, its high on Tuesday as well as a 50 percent retracement of that fall.
Still, traders say concerns over debt in some euro zone countries could crop up any time after many investors and policymakers come back from Christmas holidays.
 Already on Wednesday, Ireland's opposition Labour Party threatened to call a vote of no confidence in the deeply unpopular government if it has not set a date for an election by the end of January.

The Australian dollar hit a fresh 28-year high of $1.1095 AUD=D4 against a broadly weakening dollar.
Rising commodity prices have boosted the Aussie and helped investors shrug off fears that a recent Chinese interest rate hike would slow China's economy and thus dampen demand for Australian exports. London Metal Exchange copper hit a record high [MET/L].