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* Dollar firmer vs yen, trades near Friday’s 7-week high
* Sterling steady vs dollar, pauses after last week’s rally
* Focus on Fed’s Sept 19-20 policy meeting
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Sept 18 (Reuters) - The dollar hit an eight-week high against the yen on Monday, supported by a rise in U.S. Treasury yields, as traders eyed a Federal Reserve meeting starting the next day for clues on whether interest rates could rise again by year-end.
The greenback recorded its best week against the Japanese currency since November last week, gaining 2.8 percent, as a rise in U.S. yields bolstered its appeal and as data showing a pick up in U.S. consumer prices helped rekindle expectations that the Fed could hike rates again in December.
It built on those gains on Monday as world stocks hit record highs, suggesting a high appetite across markets for riskier assets, rising half a percent on the day to 111.41 yen . That was the dollar’s strongest since July 27.
The focus for this week is the Fed’s Sept. 19-20 policy meeting. The Fed is seen likely to announce a plan to start shrinking its balance sheet at the meeting, but is widely expected to keep interest rates unchanged - for now.
Markets are now pricing in a more than 50 percent chance of a Fed hike by the end of the year, up from only around a 40 percent chance less than a week ago, according to CME FedWatch, having brought forward their bets after a strong U.S. inflation print last week.
But although the dollar has since risen sharply versus the yen, against a basket of major currencies it gained only half a percent last week. It was 0.2 percent higher on Monday.
“The dollar-positive effect of the inflation data did not last long last week,” wrote Commerzbank strategists in a note to clients. “Even though the market sees an increasing likelihood of a rate step in December...this change of mind only refers to the most immediate Fed policy.”
“The positive inflation surprise seen last week clearly is not sufficient by far to convince the market of a noteworthy continuation of the Fed rate hike cycle.”
Sterling, which was also lifted across the board last week by a shift in expectations for interest rate rises, hit a 14-month high in early European trade before dipping back below $1.36 by 0730 GMT.
“Any BoE-fuelled sterling rally may be on its last legs; what we have defined as a ‘withdrawal of stimulus’ hiking cycle is now priced into the currency,” said ING currency strategist Viraj Patel.
“The medium-term narrative for sterling will continue to be dominated by Brexit, with Prime Minister Theresa May’s keynote speech in Florence taking centre stage on Friday,” he said, adding that any further gains in sterling this week would be capped around $1.3680.
The euro edged down 0.1 percent to $1.1924, staying below a 2-1/2 year high of $1.2092 set earlier this month. (Reporting by Jemima Kelly; Additional reporting by Masayuki Kitano in Singapore; Editing by Toby Chopra)