* Upbeat U.S. data, Yellen cements expectations for Dec Fed hike
* Euro close to 1-year low on divergent policy expectations
* Dollar at nearly 14-year highs vs currency basket
TOKYO, Nov 18 (Reuters) - The dollar was gunning for robust weekly gains on Friday after upbeat U.S. economic data stoked expectations of higher U.S. interest rates.
Also underpinning the greenback, Federal Reserve Chair Janet Yellen provided a strong signal on Thursday that U.S. interest rates will likely increase by year-end, in line with most market participants' expectations.
The yen continued to weaken in the wake of the Bank of Japan's offer on Thursday to buy unlimited bonds. The offer by the BOJ underscored to markets it is serious about keeping the yield on Japan's benchmark 10-year government bond (JGB) JP10YTN=JBTC at zero percent in its bid to control the yield curve and keep borrowing costs low. dollar erased early slight losses and charged to session highs against the yen on Friday after BOJ Governor Haruhiko Kuroda said he felt the rise in 2- to 5-year JGB yields was "inappropriate." BOJ will continue to take steps to ensure the yield curve remains in the shape needed to meet our 2 percent inflation target," Kuroda said, while refraining from commenting on foreign exchange rates
The dollar was last up 0.5 percent at 110.67 yen JPY= after rising to 110.78, its loftiest perch since June 1. It was up 3.7 percent for the week.
"The BOJ is taking steps to build up its credibility. It's not just rhetoric, or verbal intervention. Besides going to negative rates, they're actually participating in implementing steps in the direction that they want to go in," said Bart Wakabayashi, Head of Hong Kong FX Sales at State Street Global Markets.
Japanese Finance Minister Taro Aso said that while nervous moves were seen in the forex market, the underlying moves were stabilising. U.S. data gave even more credence to rate-hike bets. Housing starts marked a nine-year peak last month, weekly jobless claims fell to a 43-year low and consumer prices posted their biggest increase in six months. data pushed up yields on U.S. Treasury notes, underpinning the dollar. Yields have been on an uptrend since last week's U.S. election, amid speculation that the administration of President-elect Donald Trump will embark on inflationary policies.
"Everybody wants to buy the dollar on dips, and is waiting for dips, but there is no dip," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. "The Trump rally can continue, unless some cautious comments come out from the U.S. side."
While Yellen did not explicitly say the Fed would take action at its Dec. 13-14 policy meeting, she told a Congressional committee that a rate hike was likely "relatively soon." also pledged to serve out her term as Fed chair through 2018. Trump said during his election campaign that he would replace Yellen when her term expires.
"It's the same theme, which is continued backing up of U.S. yields as the market reprices the prospects of Federal Reserve rate hikes," said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong. "Those who were non-believers of a December hike have now moved into that camp, us included."
RBC now predicts a U.S. interest rate increase in December, followed by two more 25 basis-point hikes in 2017.
"That dynamic is helping to lift the U.S. dollar right across the board," she said.
The gap between 10-year government bonds in the United States and Germany widened to 200 basis points, its widest level since at least 1990, as investors expect the European Central Bank will keep monetary policy loose to stoke euro zone inflation. ECB's rate-setting meeting last month agreed on the need to maintain unprecedented monetary stimulus and to decide in December whether to extend the ECB's 1.74 trillion euro asset buys, minutes of the meeting showed on Thursday. euro fell 0.2 percent on the day to $1.0602 EUR= after falling as low as $1.0582, its lowest since Dec. 3. It was down 2.3 percent for the week.
The dollar index, which tracks the U.S. currency against a basket of six rivals, rose 0.4 percent to 101.240 .DXY after rising to 101.32, its highest since April 2003. It was up 2.2 percent for the week.