(Recasts, adds quotes, changes dateline PVS TOKYO)

By Anirban Nag

LONDON, Aug 20 (Reuters) - The dollar hovered near a five-week high against the yen, supported by elevated U.S. bond yields, while the euro inched up on persisting expectations of progress by euro zone policymakers in coming weeks to stem the debt crisis.

The dollar rose to 79.66 yen in early Asian trade, before easing to 79.50 yen , barely changed on the day, on steady selling from Japanese exporters who are back from their summer holidays.

Traders said that while model players are likely to buy the dollar on dips, a sustained rise above 80 yen would require a sharper spike in U.S. Treasury yields.

The 10-year U.S. Treasury yield rose to 1.86 percent

last week, bringing the yield advantage over Japanese government bonds to nearly 1 percentage point for the first time in three months.

While some operators believe that such a gap is too small to trigger a massive build-up of yen carry trade, the dollar/yen does tend to have a strong correlation with U.S. yields.

The safe-haven yen has also come under pressure as investors bought riskier assets and currencies on expectations that the European Central Bank will take bold measures to lower borrowing costs for Spain and Italy as early as next month.

"The steepening of the U.S. yield curve no doubt has led to a rise in dollar/yen," said Adam Myers, currency strategist at Credit Agricole.

"The yen will continue to stay under pressure as investors are more willing to take on risk on expectations that something positive will emerge from the euro zone in the near term. Any disappointment will see the yen being bought again."

Investors have been selling the yen so far this month, said Kimihiko Tomita, head of forex at State Street Bank in Tokyo, citing the bank's monitoring of investor flows. He added that their flows may have dominated a holiday-thinned market.

The euro was up 0.1 percent at 98.24 yen , not far from a six-week high of 98.43 yen set on Friday.

SUPPORT FOR EURO

Against the dollar, the euro was slightly higher at $1.2360 , but stuck in a $1.2240-2450 range which it has hugged in the past two weeks. Traders said buyers were cited at $1.2340 with gains likely to be met by offers in the $1.2380-1.2400 region.

With the northern hemisphere in a summer lull and an absence of key data on Monday, traders expect little action until later in the week when a euro zone purchasing managers' survey and minutes of the Federal Reserve's latest policy meeting are released.

Analysts say that if the Fed minutes show there has been an active discussion to provide additional stimulus, the dollar could come back under pressure and generate a rally in risky assets as expectations for quantitative easing as early as next month will get a boost.

While the euro could benefit from a renewed weakness in the dollar, it is unlikely to rise much unless there is more clarity on measures to tackle the debt crisis.

Some market players are looking to shuttle diplomacy in the euro zone starting later this week. French President Francois Hollande and German Chancellor Angela Merkel will meet on Thursday, a day before Greek Prime Minister Antonis Samaras arrives in Berlin.

Germany's weekly Der Spiegel magazine reported on Sunday the European Central Bank is considering setting yield thresholds for any purchases of a struggling euro zone country's bonds.

If true, this could be taken positively by markets, traders said, though the market has shown limited response so far.

The growth-linked Australian dollar was up 0.3 percent at $1.0450 , pulling away from a three-week trough of $1.0411 plumbed on Friday, and driven by higher stock markets.

(Additional reporting by Hideyuki Sano in Tokyo; editing by Stephen Nisbet)

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