December 31, 2014 / 2:21 AM / 5 years ago

FOREX-Dollar index on track for best annual gain in 9 years

* Dollar index up 12 pct in 2014, best year since 2005

* Euro hovers near previous day’s 29-month low vs dollar

* Dollar/yen up 13 pct this year

By Masayuki Kitano

SINGAPORE, Dec 31 (Reuters) - The dollar was on track to end 2014 with a gain of 12 percent against a basket of major currencies, and anticipated U.S. interest rake hikes may strengthen its appeal in the new year.

This year’s gain will be the dollar’s largest since 2005, when it climbed nearly 13 percent.

On Wednesday, the dollar held steady against the basket of major currencies.

The divergence between the U.S. Federal Reserve’s path toward rate hikes and stimulative policies in Europe and Japan has helped the dollar index - measuring its value against that basket - hit an eight-year high this year, and is likely to remain a key theme in 2015.

Recent solid data has reinforced the view that the U.S. economy is improving enough for the Federal Reserve to consider raising interest rates in mid-2015.

The dollar index last stood at 89.950 , having touched a high of 90.325 on Tuesday, its strongest level since April 2006.

Against the yen, the dollar held steady on the day near 119.53 yen. The dollar had touched a one-week low of 118.86 yen on Tuesday, having pulled back from a seven-year high of 121.86 yen set in early December.

Investor jitters over looming economic risks such as political turmoil in Greece have helped to support demand for the safe haven yen this week, along with year-end profit-taking on bullish dollar bets.

Still, the dollar has risen 13 percent versus the yen this year. The gains accelerated as the yen slid after the Bank of Japan surprised markets in late October by expanding its monetary stimulus to keep inflation expectations from flagging.

Over the course of 2015, the general direction of the dollar against the yen will probably be higher, said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.

For 2015, “if you ask whether the dollar is likely to head in the direction of 100 yen or head toward 130 yen, I think it will be the latter,” Ino said.

Still, it could be a bumpy ride.

The fact that market participants are already positioned for further yen weakness may help temper gains for the dollar against the Japanese currency, and the yen could gain a near-term boost if worries about Greece intensify, Ino added.

The euro held steady at $1.2159, hovering near a 29-month low of $1.2123 that had been set on Tuesday. The euro is down 11.5 percent for the year, on track for its biggest annual drop since 2005.

The austerity-minded leading coalition in Greece failed on Monday to secure enough votes in parliament to elect a president, paving the way for an early general election in January and throwing the country into a period of political turmoil.

The markets are now concerned that the leftwing opposition Syriza party may win the election and derail Greece’s international bailout.

The Greek political situation adds to the burden placed on the common currency, already weighed down by prospects of the European Central Bank implementing further easing steps in 2015 to shore up the euro zone economy and ward off deflation.

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