* Euro rises to 1-mo high vs dollar at $1.3796 <EUR=>
* Dollar index touches 3-week low of 79.692 <.DXY>
* Focus on U.S. retail sales
* Yen weighed on expectations BOJ may ease policy next week
* Canada dollar rises beyond C$1.02, highest since July 2008
(Adds quotes, updates prices)
By Tamawa Desai
LONDON, March 12 (Reuters) - The euro rose to a one-month high against the dollar on Friday as traders covered short positions and the U.S. unit fell on reports a policy dove was a leading candidate for vice chair of the U.S. Federal Reserve.
Reports that San Francisco Federal Reserve Bank President Janet Yellen could replace Donald Kohn as vice chairman of the U.S. central bank weighed on the greenback. [ID:nN11257901]
"The talk that Yellen, an arch-dove, was to become Fed vice chairman would be negative for the dollar," said Adam Cole, global head of FX strategy at RBC Capital Markets.
Still, analysts said Yellen's possible appointment was unlikely to prompt the Fed to change course on gradual normalisation of monetary policy later this year.
The euro's gains accelerated after a break above $1.37, triggering stop-loss sales and pushing the pair just shy of $1.38, its highest since Feb. 11, according to Reuters charts.
By 1203 GMT, the euro was up 0.7 percent at $1.3780 <EUR=>, after a failure to break above $1.38. Options traders said there was large expiry interest at $1.3750 for the New York cut.
The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, fell after breaking support of 79.80, touching a three-week low of 79.692 <.DXY>. It was last down 0.6 percent at 79.797.
The dollar also hit multi-month lows against the Swiss franc <CHF=> and Canada dollar <CAD=>. The Canadian dollar gained beyond C$1.02 to its highest since July 2008 after firm jobs data.
Traders will keep a close eye on U.S. retail sales data, which is forecast to show a 0.2 percent decline in sales, compared with a 0.5 percent increase in January. <ECONUS>
"We've had a squeeze up in euro/dollar but unless there is a significant move above $1.38 then the euro could come back down again," said Jeremy Stretch, currency strategist at Rabobank.
"If there is a disappointing retail sales reading it could lead to risk aversion and provide a catalyst for euro/dollar to come back down again."
Earlier, the yen dipped on growing speculation the Bank of Japan would take further monetary easing measures next week.
Japan's prime minister and finance minister piled pressure on the central bank on Friday, saying the government and the BOJ should work together to beat deflation. [ID:nTOE62B065]
Japan's leading business daily Nihon Keizai Shimbun said the BOJ would decide to double its 10 trillion yen in funds offered under the lending operation at its March 16-17 meeting. [ID:nSGE62A0J4]
"Doing nothing is not an option considering the political pressure the BOJ is under," said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ.
In addition, "the level of the yen certainly appears to be an issue in Japan at present," he said.
In answer to lawmaker concerns over the yen, Japanese Finance Minister Naoto Kan said markets should set currency rates but authorities could intervene if foreign exchange movements were excessive.
The euro rose to 124.64 yen, its highest since late February. It was last up 0.6 percent at 124.60 yen. <EURJPY=R>
The dollar was little changed at 90.39 yen <JPY=>, paring gains as the dollar fell broadly but still near a two-week peak of 90.83 yen hit on trading platform EBS on Wednesday.
Traders said the yen's falls may be tempered by repatriation flows ahead of Japan's financial year-end on March 31.
Such flows by Japanese firms may hit a record of more than one trillion yen this year, helped by a tax break to encourage firms to repatriate overseas profits. (Additional reporting by Jessica Mortimer; Editing by Ruth Pitchford)