(Corrects number of 2015 China rate cuts in 2nd paragraph to 5 from 4)
* Dollar supported after China rate cut boosts risk appetite
* Dollar hits 2-month high vs yen, euro slips to 2-1/2 month low
By Shinichi Saoshiro
TOKYO, Oct 26 (Reuters) - The dollar hovered near a 2-1/2-month high against a basket of currencies early on Monday after monetary easing by China over the weekend improved investor risk appetite and sent U.S. Treasury yields higher.
Stock markets worldwide soared on Friday after China cut interest rates for the fifth time this year, just a day after the European Central Bank signalled that it is ready to increase the scale of its stimulus measures.
The dollar index .DXY stood near 97.201, its highest since Aug. 12 scaled on Friday.
The greenback brushed a 2-month peak of 121.60 yen JPY= early on Monday and the euro struggled near $1.0989 EUR= , its lowest since Aug. 11.
The benchmark 10-year U.S. Treasury note yield US10YT=RR rose nearly 6 basis points on Friday as equity markets rallied and reduced demand for safe havens, providing broad support for the dollar.
"The price action underscores that the divergence theme that is central to our bullish U.S. dollar scenario is not only driven by the timing of the Fed's lift-off but by what other central banks are doing and going to do," wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
"The divergence has not peaked. Nor will it peak for at least the next year."
The U.S. Federal Reserve starts its policy meeting on Wednesday, the Reserve Bank of New Zealand meets on Thursday and the Bank of Japan on Friday.
The BOJ is gathering extra attention as a run of downbeat Japanese indicators has fanned expectations of further monetary easing.
The Australian dollar was subdued after a drop in crude oil prices hit commodity currencies on Friday. The Aussie was little changed at $0.7221 after losing 1 percent on Friday.