* Dollar touches fresh 4-month highs vs yen
* U.S. 10-year Treasury yields touch 7-year highs (Updates prices, adds comments)
By Masayuki Kitano
SINGAPORE, May 18 (Reuters) - The dollar edged higher against the yen on Friday and set a fresh four-month high, buoyed by a further rise in U.S. Treasury yields that suggests a more upbeat outlook for the world’s largest economy and possibly more rate hikes.
U.S. benchmark 10-year yields hit a high of 3.128 percent in early Asian trade on Friday, the highest in nearly seven years.
The U.S. 10-year bond yield has climbed about 15 basis points this week, putting it on track for its biggest weekly rise in more than three months.
The rising yields reflect continued optimism about the U.S. economy and expectations of growing price pressures, reinforcing expectations that the Federal Reserve would raise borrowing rates at least two more times this year and lifting the greenback.
“Moves in U.S. yields remain the focus. If they rise further the dollar could strengthen on the back of that and pull the dollar higher against the yen,” said Shinichiro Kadota, senior strategist at Barclays in Tokyo.
The dollar touched a high of 111.005 yen, its strongest level since Jan. 23, and last changed hands at 110.92 yen, up 0.1 percent on the day.
The dollar’s index against a basket of six major currencies stood at 93.467, trading within sight of a five-month high of 93.632 set earlier this week.
The euro inched up 0.1 percent to $1.1806. On Wednesday it had set a five-month low of $1.1763 as it came under pressure on concerns about the demands of populist parties likely to form Italy’s next government.
Italian markets had been jolted on Wednesday by a draft coalition document showing plans to ask the European Central Bank to forgive 250 billion euros in debt, and create procedures to allow countries to exit the euro.
But broader Italian markets held up better on Thursday as investors played down the broader impact on euro zone political stability and questioned whether the Italian parties would really follow through on such plans.
On Thursday, the far-right League and 5-Star Movement agreed the basis for a governing accord that would slash taxes and ramp up welfare spending.
A 5-Star source said the programme contained no reference to a possible exit from the euro.
The euro has slumped six cents from more than $1.24 in about a month, after a huge dollar rally. Investors are betting U.S. interest rates will need to rise further, while other central banks are postponing monetary tightening.
That has forced investors who took big positions against the dollar anticipating a fall in 2018 to unwind and cover their positions, pushing the greenback even higher.
The dollar will probably stay on solid footing against the yen and the euro in the near term, with U.S. economic data looking more upbeat compared to the recent indicators out of the euro zone and Japan, said Tan Teck Leng, forex analyst for UBS Wealth Management in Singapore.
In order for the dollar’s rally to lose momentum and start reversing, there needs to be an improvement in euro zone and Japanese economic data, Tan said.
“We need the data in Europe, in Japan to recover, because in the year to date, data disappointment was happening in Europe and Japan but in the U.S. it was a different picture so there was the divergence,” Tan said.
Most emerging market currencies continued to wilt against the surging dollar.
The Indonesian rupiah weakened half a percent to 14,115, its lowest in more than 2-1/2 years and shrugging off a rate rise by the central bank late on Thursday. (Reporting by Masayuki Kitano Editing by Eric Meijer and Kim Coghill)