Dollar inches higher on diverging central bank policies

The U.S. dollar rose against major currencies for a third straight session on Friday on diverging monetary policy between the Federal Reserve and other major central banks.

The euro hovered near a 28-month low against the greenback, while the dollar touched a more than one-week high against the yen in a continuation of dollar strength on the back of the Fed's hints at tighter monetary policy on Wednesday and looser policies in Europe, Japan and Switzerland.

"Looking into 2015, the prospect of European Central Bank quantitative easing and Fed normalization will make it very hard for the euro not to go down further," said Jens Nordvig, head of G10 FX strategy at Nomura Securities International in New York.

He said the euro would test $1.20 by early January. The euro was last down 0.18 percent against the dollar at $1.2263, near a 28-month low of $1.2245 touched Dec. 8.

Analysts said a lack of U.S. economic data and some pause in the dollar's rally was keeping the euro from hitting those lows.

"To get to new extremes, sometimes we need an external force," said Marc Chandler, chief currency strategist at Brown Brothers Harriman in New York.

The dollar has gained against other major currencies on the view that expected Fed interest rate increases will boost the greenback by driving investment flows into the United States.

The dollar slipped against the rouble, meanwhile, and was last down 4.35 percent against the Russian currency to trade at 59.28 roubles. The rouble has seen intense selling pressure this week, and at one point was down about 20 percent against the dollar.

Analysts attributed the dollar's decline against the rouble to a rebound in oil prices and Russian Finance Minister Anton Siluanov confirming his ministry had sold foreign currency. Expectations that exporters will increase dollar sales also helped the rouble.

Sales of oil and gas are Russia's chief source of export revenue.

The dollar was last up 0.12 percent against the Swiss franc at 0.9810 franc, off a 28-month high of 0.9847 touched Thursday. The dollar was last up 0.48 percent against the yen at 119.38 yen after hitting a more than one-week high of 119.50.

The U.S. dollar index, which measures the greenback against a basket of six major currencies, was last up 0.18 percent at 89.394.

On Wall Street, the benchmark S&P 500 stock index was last up 0.29 percent. (Reporting by Sam Forgione; Editing by James Dalgleish)