* Yen slips to 7-month low against buoyant dollar
* Dollar index extends gains, approaches one-year peak
* Euro zone inflation data key this week
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, Aug 25 The euro fell to its lowest in nearly a year against a broadly firmer dollar on Monday after comments from the head of the European Central Bank raised prospects of more policy easing as early as next week.
The common currency skidded to $1.3185 in early trade, its lowest since September 2013, from around $1.3246 late in New York on Friday. It was last at $1.3204, down about 0.3 percent on the day.
That helped lift the dollar index up about 0.2 percent to 82.528, heading towards its Sept. 5 peak of 82.671. A break above that would take it to levels not seen since July 2013.
In a stronger language than he has used in the past, ECB President Mario Draghi on Friday confirmed the central bank is prepared to respond with all its "available" tools should inflation drop further.
"Even more significantly, Draghi departed from the script originally published on the ECB's website on delivery, adding a section on inflation expectations during August," said Ray Attrill, global co-head of FX strategy at National Australia Bank.
"He noted a decline in short, medium and longer term inflation expectations and indicated this would be acknowledged at the Sept meeting. So it looks like more easing ahead."
The ECB holds its next policy review on Sept 4.
Ahead of that, investors will scan euro zone inflation data due on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July. That is well below the ECB's danger zone of 1.0 percent and its target of just under 2.0 percent.
In contrast, Federal Reserve Chair Janet Yellen on Friday gave a nod to the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.
"Some people expected more dovish comments from Yellen, but it wasn't a big change," said Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm.
As a result, Fed funds futures fell back <0#FF:> as the market priced in the risk of an earlier move on rates. Yields on two-year Treasury paper climbed over 8 basis points for the week, the largest such rise since June last year, while the yield curve flattened markedly.
That helped the dollar outperform, rising to a seven-month high against the yen at 104.49 on Monday morning before pulling back slightly to stand at 104.24 yen, still up 0.3 percent on the day.
The New Zealand dollar plumbed a six-month low of $0.8336 and was last down 0.6 percent at $0.8349.
Even before its latest jump, the dollar had increasingly attracted bulls. Speculators boosted bullish bets on the greenback in the latest week to their highest in more than two years, according to data from the Commodity Futures Trading Commission released on Friday.
The CFTC said the net dollar long position soared to $30.40 billion in the week ended Aug. 19, from $27 billion the previous week. That was the highest net long in the U.S. dollar since June 2012.
A bank holiday in Britain could mean thinner trading ahead in the European session. (Editing by Shri Navaratnam and Eric Meijer)