FOREX-Dollar inches lower into Christmas lull

* Dollar camped around 117.50 yen, $1.0440 per euro

* Around 1 percent off highs hit earlier in December

* Further dollar gains expected over time as yields diverge

* Italian govt approves rescue package for troubled banks

By Patrick Graham

LONDON, Dec 23 (Reuters) - The dollar headed into the Christmas break on Friday just over half a percent off highs hit after this month’s U.S. Federal Reserve policy meeting, with a handful of second tier data unlikely to disturb markets already firmly in holiday mode.

With Tokyo already absent, the dollar inched down to 117.47 yen, compared with 10-month highs of 118.66 yen reached a week ago and almost unchanged for the year, having been as low as 99.00 in June.

The euro was also a shade firmer at $1.0440, having rebounded only modestly from a nearly 14-year low of $1.0350 set earlier in the week.

Bets that the greenback will strengthen further are one of the dominant expectations on markets for the start of next year, but dealers expect little immediate progress over the next two weeks when most investors will be absent and volumes low.

In support of the yen, the euro and sterling are the scale of their falls over the past six months, tempting short-term players to take some profit on those trades.

Both the yen and the euro may also be safe havens for capital in the face of concerns over security and the risk a Donald Trump White House, while supporting inflation and a repatriation of funds to the United States, may provoke a trade war with China.

The dollar is up more than 7 percent against a basket of currencies since lows hit on U.S. election night in November but has been flat for the past week.

“My overall sense is that we’ll start the year eking out further gains from the post-Trump trends, before we get a change of tack,” said Societe Generale strategist Kit Juckes.

“I reckon dollar-yen will get as high as it can relatively early in the year, the euro as low as it can by the time of the French elections in May and Treasury yields may get as high as they can sometime soon after that.”

The dollar index was marginally lower on the day at 103.04, just over half a cent off its post-Fed peak of 103.65.

Bets a Trump Administration and Republican-controlled Congress will push up inflation next year have driven two-year U.S. paper almost two full percentage points above their German equivalent, the widest since 2005.

At the same time, the Bank of Japan and European Central Bank are actively working to keep their short-term yields deep in negative territory, hinting the gap may widen further.

“Yield spreads should attract more capital into the USD,” said Ray Attrill, global co-head of FX at NAB.

“Monetary policy divergence is set to be more pronounced in 2017 with Fed tightening while BoJ, ECB and BoE further expand their balance sheets.”

Elsewhere, the Italian government approved a plan for the rescue of Monte dei Paschi di Siena after the world’s oldest bank failed to win backing from investors.

If the package is seen as credible it could lessen one drag on euro sentiment. Investors will also piece over any possible impact on the dollar from the fines being handed out to European banks by U.S. regulators. (Additional reporting by Wayne Cole in Sydney; Editing by Alison Williams)