* U.S. consumer sentiment buoys dollar
* Dollar gains for third week vs the yen
* Rise in Treasury yields also boosts dollar
NEW YORK, May 17 The dollar rallied across the board on Friday, topping the 103-yen level as it hit a 4-1/2-year high against the Japanese currency, after data showing a robust rebound in U.S. consumer sentiment prompted investors to add to bullish bets.
Speculation that the Federal Reserve would wind down its asset-buying program this year gathered pace, helping push the dollar upward against a basket of currencies to a near three-year peak.
The greenback broke through the 103-yen mark after a report showed U.S. consumer sentiment in early May rose to the highest in nearly six years as Americans felt more confident about their financial and economic prospects.
The dollar was also buoyed by a rise in U.S. Treasury yields, which move inversely to price, although yields were rangebound.
"Following the report, the USD/JPY surged through the weekly highs and cracked 103.00 yen for the first time since October 2008," said Christopher Vecchio, currency analyst at DailyFX in New York.
The dollar rose as high as 103.29 yen and last traded at 103.24, up 1 percent on the day. For the week, the dollar gained 1.6 percent against the yen, its third straight week of advances and bringing the year-to-date rally to 19 percent.
The dollar index, which measures the U.S. currency's value against a basket of six major currencies, rose to its highest in nearly three years on Friday while gold fell for a seventh straight session, its longest losing streak in four years, on the dollar's rise.
"Markets want to be long the dollar and there is a snowball effect going on," said Sebastien Galy, FX strategist at Société Générale in New York. "Markets are also desperate for trends, and once they identify one they forge ahead, forcing people to build up dollar positions, particularly as a cross-asset hedge."
Few fear that the dollar rally will lose steam anytime soon.
"It is a dollar story this year as the U.S. labor and housing markets appear to be recovering," said Peter Kinsella, currency strategist at Commerzbank in London. "And while we do expect the Fed to be cautious in withdrawing stimulus, the economic recovery should drive the dollar higher," he said.
The euro fell to a six-week low against the dollar, weighed by talk that the European Central Bank was checking banks' preparedness to handle a potential cut in its deposit rates.
ECB board members Joerg Asmussen and Benoit Coeure said on Friday that monetary policy will remain accommodative, bolstering a view the central bank could use unconventional measures like introducing negative deposit rates in coming months to support the recession-hit economy.
"People are positive about the U.S. economic recovery despite recent weak data and today's theme is mostly about the broadly strong dollar," said Charles St-Arnaud, FX strategist at Nomura Securities in New York.
"Meanwhile, data in the euro zone shows they remain in a recession, and raised expectations the ECB will take further action is weighing on the euro," he said.
The euro fell as low as $1.2795, its lowest since April 4. It last traded at $1.2833, down 0.4 percent on the day. The euro fell 1.23 percent for the week, its worst weekly performance since the week ended March 29.
"The negative deposit rate talk is a threat that the ECB is using to keep the euro lower," said Ian Gunner, portfolio manager at Altana Hard Currency Fund in London.
Lowering the deposit rate to negative would make holding euros unattractive and lead to a broad sell-off, traders say.
Against the yen, the euro was at 132.47 yen, up 0.6 percent with the session peak of 132.48, a near 3-1/2-year high.