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* Dollar rally resumes after Fed comments
* Offshore yuan hits 6-year low
* Euro at 7-month lows after Draghi quashes tapering talk
* Sterling weaker as UK PM May attends EU summit
By Patrick Graham and Jemima Kelly
LONDON, Oct 21 (Reuters) - The dollar was on course for its third consecutive week of gains against the basket of currencies used to measure its broader strength on Friday, driven to an eight month high by hardening expectations of a rise in interest rates in December.
In a year where investors have never really got close to fully pricing in a move, short-term U.S. rates now put a 75 percent probability on the Federal Reserve raising official borrowing costs for only the second time in more than a decade.
After a blip in the first half of this week, comments by New York Fed President William Dudley and Donald Trump's failure to register a big win in Wednesday's presidential debate has hardened that view, fueling another surge for the greenback.
European Central Bank chief Mario Draghi's quashing of speculation it was already considering how to wind down bond purchases when the time comes also cooled any signs of recovery for the euro, sending it below $1.09 for the first time since March.
"The dollar strength is more of a continuation of yesterday's move, when rate hike expectations for December rose somewhat on the back of the data. This morning I think is just a continuation of that move," said Esther Reichelt, a strategist with Commerzbank (DE:CBKG) in Frankfurt.
By 1130 GMT, the dollar index .DXY was up 0.2 percent on the day, having briefly passed March highs. The euro fell a third of a percent to $1.0891.
Some analysts said that investors were again shifting towards "carry" trades that use the expanding difference between interest rates on the dollar and those in other currencies to rack up profit.
"The euro was left bruised and battered after the October ECB meeting," analysts from Credit Agricole (PA:CAGR) said in a note to clients.
"We suspect that the euro has also been dragged lower by its appeal as a funding currency at a time when the G10 FX carry trade is staging a return. This is consistent with the single currency having broken to new lows against G10 high-yielding and commodity currencies recently."
Another reason for seeking the security of U.S. assets is the steady depreciation of China's yuan CNH=D3 , which dropped to its lowest level in six years against the broadly stronger greenback.
Beijing spent almost a trillion of its dollar reserves fighting a fall in the currency to similar levels earlier this year but has moved to targeting a broader basket of currencies, meaning dollar gains globally naturally shift the exchange rate.
But with most trade with China still done in dollars that may not ease fears of another deflationary impulse for Western economies as a result.
Sterling, whose 20 percent fall has been the biggest story of the past three months among the majors, was also back on the defensive in the face of the dollar's strength.
The language from European officials towards Britain at Prime Minister Theresa May's first summit since June's vote for a Brexit from the EU did not augur well for the pound. French President Francois Hollande said if May wanted a "hard" Brexit, then negotiations would be very tough. pound, generally more stable this week, lost 0.3 percent to $1.2212 and was flat against the euro. GBP=D4 EURGBP=D4
($1 = 0.9152 euros) (Editing by Toby Chopra)