* EUR/USD extends gains, hits highest since January 2015
* Euro boosted as ECB’s Draghi does not talk it down in Wyoming
* USD/JPY down but above recent low
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Aug 28 (Reuters) - An already weak dollar dropped to 16-month lows against a basket of major currencies on Monday, as flooding caused by Tropical Storm Harvey paralysed the United States’ fourth-biggest city and drove worries about a hit to the economy.
The greenback had already fallen sharply on Friday, after U.S. Federal Reserve Janet Yellen failed to mention monetary policy at the closely watched Jackson Hole meeting in Wyoming. Investors saw this as evidence that Yellen was comfortable with their rate hike expectations - currently only one is priced in by the end of next year.
The euro, meanwhile, climbed to a 2-1/2-year high close to $1.20, extending gains made at the end of last week after European Central Bank President Mario Draghi held back from talking down the buoyant currency at the same meeting.
The dollar index - which measures the U.S. currency against six major rivals with the euro given the heaviest weighting – was down 0.3 percent by 1200 GMT at 92.501, having earlier fallen to as low as 92.372, its weakest since early May 2016.
“Markets will be closely watching the damage from Harvey and its effect on the U.S. economy,” wrote FXPro analysts in a note to clients, pointing out that Hurricane Katrina had in 2005 halved U.S. economic growth in the quarter that followed.
A public holiday in global foreign exchange capital London kept the market subdued, with most currencies trading in narrow ranges.
By 1200 GMT, the euro was up just 0.1 percent at $1.1924 , having touched $1.19665 in Asian trade, its highest since January 2015. It was on track for a sixth straight month of gains against the dollar – its best run in five years.
“This is about what (Draghi) did not say,” said Commerzbank currency strategist Esther Reichelt, in Frankfurt. “He does not seem to be overly concerned with the current euro levels, which is the market’s justification to move the euro higher.”
The euro was broadly expected to remain firm, at least in the short term, with investor focus on the ECB and whether it announces plans to reduce debt-buying at its September policy meeting next week.
The greenback slipped 0.1 percent against the safe-haven Japanese yen to 109.30 yen, clear of the four-month low of 108.605 touched on Aug. 18.
The pound was slightly higher on the day at $1.2916, having briefly touched a 13-day peak of $1.2946.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Additional reporting by Shinichi Saoshiro in Tokyo and Ana Nicolaci da Costa in Wellington; Editing by Richard Balmforth