* Dollar adds to gains after jump on Fed chief’s comments
* Yellen signals rate rise possible in first half of 2015
* Dollar index at 3-week high
* Franc broadly weaker after rate meeting
* China’s yuan deepens slide, hits one-year low
By Patrick Graham
LONDON, March 20 (Reuters) - The dollar powered higher against its major currency peers on Thursday after a surprise message from Federal Reserve head Janet Yellen that rises in U.S. interest rates were not as far away as most had thought.
Yellen said the U.S. central bank would probably end its massive bond-buying program in the autumn, and could start to raise interest rates around six months later, sooner than the consensus of market expectations.
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.
It gained more than a cent against the euro initially after Yellen’s comments on Wednesday, and after a sticky start, drove another half a percent higher in morning trade in Europe.
“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.”
The dollar index, measuring its strength against a basket of other major currencies, rose to a three-week high of 80.304. It strengthened past resistance around $1.3810 per euro to trade 0.5 percent stronger at $1.3763.
The yen fell 0.13 percent to 102.48 yen.
“The Fed has managed to strengthen market expectations of a normalisation of its monetary policy over the coming year,” said analysts from Germany’s Commerzbank, often seen as representative of what big European manufacturers are thinking.
“Yesterday’s dollar reaction was only a first taste of what is yet to come.”
Many analysts have been burnt 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 European Central Bank to ease its own 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,” Simon Derrick, a strategist with Bank of New York Mellon, said, 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.”
If the heart of the argument for dollar strength this year is a rise in the return on U.S. Treasuries then Yellen’s comments certainly delivered.
The benchmark Treasury yield was trading around 9 basis points higher than a day earlier at 2.77 percent.
The Canadian dollar slid to a 4-1/2 year low of C$1.1273 against its U.S. counterpart and was last at C$1.1256, while the Australian dollar fell back below 91 U.S. cents and was last at $0.9023.
The Swiss franc also gave up 0.6 percent 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.
Gallo said there was certainly more room for the dollar to gain against its Canadian counterpart and others. It was roughly a third of a percent higher against the Canadian, Australian and New Zealand dollars.
“I would look for the dollar to remain strong against the weaker currencies. We may have more difficulty against the euro and sterling.”
China’s yuan also remained a focus, plunging to a one-year low after the People’s Bank set a lower guidance for the currency, the second consecutive daily fall of more than 1 percent from the central bank’s midpoint.
The yuan has continued to weaken since the bank announced over the weekend it would double the currency’s permitted trading range to 2 percent, underlining growing concerns over China’s economy and financial sector. (Editing by Sophie Hares)