* Dollar gains against euro, yen
* Iraq fighting underpins safety bid for dollar
* Yen falls as traders eye more BoJ stimulus
By Sam Forgione
NEW YORK, June 13 The dollar edged higher against a basket of major currencies on Friday for the first time in three sessions after violence in Iraq triggered a safety bid for the U.S. currency, while higher U.S. bond yields underpinned the move.
Escalating insurgent conflict in Iraq resulted in a cautious mood, while renewed focus on the potential for more monetary stimulus in Japan and higher U.S. Treasury yields drove demand for the dollar.
"The dollar is enjoying a safety bid on renewed instability in Iraq," said senior analyst Joe Manimbo at Western Union Business Solutions in Washington.
Traders dismissed data showing slightly weaker-than-expected U.S. consumer sentiment in June. The Thomson Reuters/University of Michigan's preliminary June reading on the overall index on consumer sentiment came in at 81.2, down from 81.9 the month before.
The dollar also advanced against the Japanese yen after traders reconsidered the potential for more monetary stimulus from the Bank of Japan. The central bank decided to keep monetary policy steady, but analysts said the potential for weaker economic growth in the second quarter could trigger more easing.
"There might be some renewed weakness in Japan, and if that plays out, that would increase pressure on the Bank of Japan to further loosen monetary policy," said Manimbo of Western Union.
The preference for the dollar as a safe-haven currency weighed on the euro, which has continued to weaken after the European Central Bank's decision last Thursday to cut rates to record lows. Analysts said the ECB is likely to implement more monetary easing, while the U.S. Federal Reserve is moving toward tightening monetary policy.
"You still have that diverging path of monetary policy between Europe and the Fed, and that should support a lower euro versus the dollar over time," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.
The U.S. dollar index, which measures the dollar against a basket of six major currencies, was last up 0.08 percent at 80.642. The euro was last down 0.11 percent against the dollar at $1.3536. The dollar was last up 0.34 percent against the yen at 102.060.
The preference for safety weighed on the New Zealand dollar , which was last down 0.34 percent at $0.8650 after having rallied to a near one-month high on Thursday. British sterling, meanwhile, extended gains after the Bank of England hinted Thursday that interest rates could rise this year.
Benchmark 10-year U.S. Treasury notes were last down 7/32 in price to yield 2.61 percent, pressured by rising UK gilts yields and on expectations of an earlier-than-expected Fed rate hike. (Reporting by Sam Forgione; Editing by Nick Zieminski)