* Rising U.S. yields push dollar/yen near 2-month high
* Euro hits 3-1/2-month low after Greece rating downgrade
* U.S. existing home sales surge, but Q3 GDP revised lower (Updates prices)
By Steven C. Johnson
NEW YORK, Dec 22 (Reuters) - The dollar climbed in tandem with stocks and U.S. bond yields on Tuesday, hitting its highest level against the yen in nearly two months as strong U.S. housing data boosted expectations for an economic recovery.
The euro fell to a 3-1/2-month low against the dollar, pressured by worries about Greece's fiscal health after Moody's became the third major rating agency to downgrade the country's debt rating this month. For more, see [ID:nLDE5BH149]
Trading volume was low ahead of the Christmas holidays and analysts tied some of the dollar's gains to a bout of year-end profit-taking on short dollar positions.
"While market talk (Monday) suggested the dollar was overbought and a technical correction was coming, today's price action demonstrates the cost of fighting a market trend," said Michael Woolfolk, senior currency strategist at BNY Mellon. "The current trend is for a stronger U.S. dollar."
A surprisingly strong 7.4 percent rise in existing U.S. home sales last month offset a sharper-than-expected downward revision to U.S. third-quarter growth and boosted optimism about recovery in the world's largest economy. [ID:nN22392364]
The dollar rose 0.7 percent to 91.79 yen <JPY=> after rising as high as 91.86 yen, according to Reuters data, its highest level since late October.
The euro dropped to $1.4219, according to Reuters data, the lowest level since early September. It was last down 0.2 percent on the day at $1.4249 <EUR=>.
Moody's move to cut Greece's credit rating by one notch to 'A2' highlighted the fiscal problems facing some euro zone countries.
"The next crucial step is for Greece to outline credible steps to deal with its deficit," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "This will continue to be a big structural negative for the euro that will remain in place over the medium term."
Sterling slipped to a more than two-month low of $1.5924 <GBP=>, according to Reuters data, after a smaller-than-expected revision to third-quarter UK growth. [ID:nLDE5BL1FZ]. It last traded down 0.4 percent at $1.5969.
Expectations for stronger U.S. growth boosted Treasury yields and widened the spread between short-term U.S. and Japanese government bond yields, providing an impetus for traders to bid up the dollar against the yen.
Bank of Japan Governor Masaaki Shirakawa said Monday the bank will maintain its current "effective zero interest rates," and is ready to act promptly to fight deflation.
The spread between the yields on the U.S. two-year note <US2YT=RR> and Japan's two-year bond <JP2YTN=JBTC> has widened to about 70 basis points from 48 basis points at the start of the month.
The negative correlation between the dollar and stocks that was in place for much of 2009 has broken down in the past few trading sessions, although some analysts expect the link to return next year.