* Dollar/yen hovers below Friday's near 3-week high
* Euro holds steady, dollar index little changed
* Data on U.S. durable goods due later on Monday
By Anirban Nag
LONDON, Aug 26 (Reuters) - The dollar fell against the yen on Monday, hurt by a dip in U.S. yields after disappointing housing data raised some uncertainty about an early withdrawal of stimulus by the Federal Reserve.
Traders said if consumer durables data, due out later in the day, turned out to be weaker than expected the dollar could drop further. Forecasts are for demand for durable goods to drop in July from a month earlier.
Amid thin trading conditions due to a market holiday in London, the dollar slipped 0.2 percent versus the yen to 98.50 yen, below Friday's high of 99.15 yen, the U.S. currency's highest level since Aug. 5.
The euro was flat at $1.3370 while the dollar index, which has a strong correlation with 10-year U.S. yields , was steady at 81.408, off a recent one-week high of 81.719. The 10-year bond yield fell on Friday after a steep drop in U.S. new home sales.
"With a notably more fragile housing market the Fed will find it impossible to begin tapering bond purchases as early as September, many FX traders might argue. I am not so certain," said Ulrich Leuchtmann, currency strategist at Commerzbank.
While a surge in mortgage rates due to higher bond yields may have hurt demand for new homes, Leuchtmann said that the Fed should start withdrawing stimulus and normalise interest rates to prevent another housing bubble.
"Should the ultra doves maintain the upper hand in the FOMC, and should they be prepared to accept a new property bubble in order to artificially lower the unemployment rate, that would be a negative signal for the U.S. currency," he said.
Durable goods orders will be the focus in the near term and the data should keep alive the debate on whether the Fed will start tapering stimulus next month or not.
"The release of durable goods orders should keep the dollar on the defensive," BNP Paribas analysts said in a note. "The tapering debate will likely continue and we suspect that any further comments from Fed officials will not deliver a clear verdict on the prospects for September tapering."
Much of the market still thinks the Fed will begin tapering in September, but a lot will depend on the August payrolls report due on Sept. 6. Analysts suspect it would take a very weak reading to push back the start date.
Speculators pared their bets in favour of the U.S. dollar for a fifth consecutive week in the week ended Aug. 20, data from the Commodity Futures Trading Commission showed on Friday.
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