* Dollar index falls, technicals suggest more selling
* Sluggish U.S. growth weighs on greenback, U.S. yields
* Euro, sterling, yen hit multi-month highs vs dollar
(Adds details, updates prices)
By Vivianne Rodrigues
NEW YORK, Aug 3 (Reuters) - The dollar tumbled on Tuesday against the euro, the yen and sterling as a fall in benchmark yields to all-time lows offered investors little incentive to buy assets denominated in the U.S. currency.
The euro hit a three-month high at $1.3261. And the dollar index, which measures the greenback against a basket of currencies, fell below its 200-day moving average for the first time since January, which analysts said signals more declines.
A string of weak U.S. economic data and speculation the Federal Reserve may consider pumping more money into the economy through new bond purchases has contributed to dwindling demand for the dollar.
Yields on benchmark two-year Treasury notes fell to a record low of 0.53 percent earlier.
Douglas Borthwick, a managing director at Faros Trading LLC, in Stamford, Connecticut, noted that two-year swap spreads between the United States and Europe are currently at about 69 basis points.
"The yield differential is crying out for higher euro/dollar," said Borthwick.
In the past five years, when the swap spread has been at these levels, the average euro/dollar rate was 1.4192, he said.
The euro was last up 0.4 percent at $1.3230 EUR=. It was still in an uptrend after Monday's break at $1.3125 of a 38.2 percent Fibonacci retracement of its move from the November peak to the June trough, according to Reuters data.
The next threshold on that basis is the 50 percent retracement around $1.3510.
Traders said if the euro can end the week above $1.3350, a level last seen before fears about Greece accelerated, markets would take it as a bullish sign that could put the $1.3510 level within range.
Stronger growth in Europe and Asia raises the chances that central banks in those regions could raise interest rates before the U.S. Federal Reserve. Such moves would boost demand for higher-yielding Asian and European currencies.
Data on Tuesday showed contracts for pending U.S. home sales hit a record low in June, while U.S. new factory orders also fell. For more, see [ID:nN03154124]
Fed Chairman Ben Bernanke said Monday the economy had yet to recover fully and interest rates should remain low. The Wall Street Journal in a report on Tuesday suggested the Fed may consider renewing Treasury or mortgage purchases, a policy it ended four months ago. [ID:nSGE672028]
"Evidence of near paralysis in the U.S. economy has pushed U.S. yields consistently lower, and until yields bottom, the dollar will remain under pressure," said Kathy Lien, director of research at GFT Forex in New York.
Sterling was up 0.3 percent at $1.5943 GBP=D4, near a six-month peak of $1.5968 hit earlier.
The dollar index .DXY was down 0.4 percent at 80.587 and the greenback fell to 85.69 yen JPY=, its weakest level since November. The euro shed 0.4 percent to 113.56 yen EURJPY=.
Japanese Finance Minister Yoshihiko Noda said on Tuesday that excessive, disorderly moves in the foreign exchange market were undesirable and that too strong a yen hurts exports and households. [ID:nTKX006920]
TIME TO TAKE PROFITS?
Brown Brothers Harriman strategist Marc Chandler said the yen's strength may aggravate the deflationary forces in Japan, but rather than intervene in the forex market, pressure on the Bank of Japan may intensify so that it takes additional steps, such as increasing its Japanese government bond purchases or expanding existing lending facilities, to combat deflation.
He also warned the market may be on the verge of overselling the dollar the same way it did the euro in June.
In June, fear that debt crises in Greece, Spain and elsewhere were threatening the future of the euro zone pushed the euro below $1.19, its lowest level since 2006.
But with euro zone economic data holding firm, attention has turned to the dollar and signs of a slowing U.S. economy. "The euro could still have a lot of life left in this recent run," said Dan Cook, a senior market analyst at IG Markets Inc in Chicago. "Even so, the prudent trader knows that in most cases, it is best to lock in at least partial profit, before the market has a chance to take it all away."
(Additional reporting by Steven C. Johnson in New York; Editing by Eric Walsh)