* Yellen signals rate rise possible in first-half 2015
* Dollar index at three-week high (Adds late price movements, quotes)
By Michael Connor
NEW YORK, March 20 (Reuters) - The dollar rose to a three-week high against other major currencies on Thursday after Federal Reserve Chair Janet Yellen surprised world markets by signalling that increases in U.S. interest rates were not as far away as most had thought.
The U.S dollar index, which tracks a bundle of currencies traded against the greenback, rose for a second straight day and added nearly 0.2 percent on Thursday to stand at 80.190, a level last touched on Feb. 27.
The British pound hit a five-week low against the dollar , while the euro backed away further from piercing the $1.40 level and was last off 0.4 percent at $1.3780.
After losing more than 1 percent against the dollar on Wednesday, the Japanese yen nudged up 0.1 percent for the day to 102.45 yen to the dollar.
Yellen on Wednesday said the U.S. central bank would probably end its massive bond-buying program in the autumn and could start to raise benchmark rates around six months later, sooner than the consensus of market expectations.
That appeared to leave the Fed markedly less accommodative than central banks in Europe, Japan and elsewhere, according to Camilla Sutton, chief foreign exchange strategist at Scotiabank in Toronto.
“It is hard to ignore that Chair Yellen did not sound like the dove we expected and, in fact, sounded relatively optimistic about the timing of interest rate hikes. This is (US dollar) positive and supports our bearish euro and yen call,” Sutton said.
The dollar, whose strength this year was one of the big bets of many banks in January, has struggled so far in 2014, weighed down by a rough winter that has at least temporarily cooled jobs growth and other indications of a broadening economic recovery.
“From this point forward, at least for the time being, you will see a firmer tone to the dollar,” said Stephen Gallo, a strategist with Canadian bank BMO in London.
“Whether this kicks on will depend on the data showing the U.S. economy emerging nicely from the weather-related dip, but until we get the next batch of data at the start of next month, Yellen has set the tone.”
Against the euro, the dollar strengthened past resistance around $1.3810 per euro to trade 0.4 percent stronger at $1.3775.
“Suddenly the market spotlight is back on diverging outlooks for global monetary policy, casting the dollar in a better light than the euro,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.
Europe’s chief central banker has said the European Central Bank stood ready to support to the 18-member economy given that the strong euro poses a recovery risk.
“Those fresh dovish signals from the ECB left the euro particularly vulnerable to its recent dip against the dollar,” Manimbo said in a note to clients.
Many analysts have been burned by the dollar’s failure to rise in the first quarter of 2014, hit by a combination of the poorer U.S. economic numbers, the reticence of the ECB to ease policy further and a flood of money returning to the euro zone’s battered southern bond markets.
Some were unwilling to buy the idea that Yellen’s comments marked a watershed in that debate.
“There’s a lot of people who believe that the dollar should be solidly higher,” said Simon Derrick, a strategist with Bank of New York Mellon, speaking earlier in the day.
“But the hard facts are that something different has been going on and chiefly that has been a version of the carry trade, among other things taking advantage of higher yields in the euro zone periphery. We still face a 12-month period where we will have cheap money being pumped out of the U.S.”
The Swiss franc also lost ground against the dollar, unmoved by a Swiss National Bank statement and news conference which tweaked its message on inflation but offered no sign of a shift in policy. (Editing by James Dalgleish)