U.S. Markets closed

FOREX-Dollar weakens, keeps euro underpinned near recent highs

* Dollar index falls, lending support to the euro

* Yen near 4-yr low vs euro, 5-yr vs GBP, 23-yr low vs Swiss

* Euro also helped by rising short term money market rates

By Anirban Nag

LONDON, Nov 26 (Reuters) - The dollar fell against a basket of currencies on Tuesday, as lower U.S. yields drove investors to trim long bets and gave a fillip to the euro that has so far proven resilient to talk of looser monetary policy.

Expectations that month-end rebalancing flows by asset managers could also see the dollar weaken against currencies including the euro and the British pound.

The dollar index was down 0.2 percent at 80.750, reversing Monday's gains and pulling away from last week's high of 81.29 as U.S. 10-year Treasury yields slipped after data on Monday showing contracts to buy previously owned U.S. homes hit a 10-month low in October.

The euro was up 0.2 percent at $1.3550, having hit a session high of $1.35715 and triggering stop loss buy orders above $1.3560. Near-term resistance is at its Nov. 20 high of $1.3584.

"The dollar's own issues about whether Fed tapering will take place or not make the euro the next best alternative," said Daragh Maher, currency strategist, at HSBC. "But the euro is looking rather toppish here."

Part of the reason for the euro holding up is some speculation that euro zone inflation, due later in the week, could show a slight rise in prices. That would push back expectations that the European Central Bank will take further action to fight disinflationary pressures in the near term.

Forecasts are for November euro zone flash inflation at 0.8 percent, year-on-year, up from 0.7 percent in October. Last month, after a shock drop in inflation, the ECB cut rates to a record low, pushing the euro to a near two-month trough.

"Inflation readings are starting to have a much greater impact on currencies than before," added HSBC's Maher.

Also with excess liquidity in the euro zone banking system dwindling to its lowest level since September 2011, short term market rates are climbing and helping the euro.

The euro was trading near a four-year high against the yen at 137.45 yen.

But the dollar was down 0.3 percent at 101.405 yen, having pulled away from a six-month high of 101.915 yen hit on Monday after the housing data. The data raised questions about the economic recovery, prompting profit-taking in the dollar, which had gained 1.9 percent versus the yen in three sessions.

"Short yen positions appear stretched and we have taken profits in our long dollar/short yen position," said Yujiro Gato, currency strategist at Nomura. "Dollar/yen should be trading in a 100-102 range in the next five weeks with a drop to 100 and below a good level to go long on the dollar again."

Gato added new Japanese investment rules could also see some buying of the yen against the dollar and other major currencies by retail investors in the short term.

However, in the longer term the yen will stay weak on expectations the Bank of Japan's commitment to an ultra-easy policy will keep it the best funding currency for carry trades, especially against European currencies.