* Reduced safe-haven move supports stronger greenback
* Dollar index set for biggest weekly fall since early May
* Sterling dips from recent peaks tied to economic strength
* U.S./U.K. two-year yield spread widest since Aug. 2011 (Updates market action, changes byline, dateline, previous LONDON)
By Richard Leong
NEW YORK, June 20 (Reuters) - The dollar rose on Friday on higher U.S. bond yields, while sterling slipped from its recent peaks tied to expectations the Bank of England might raise interest rates by early 2015 on signs of a strengthening British economy.
Reduced jitters about the fighting in Iraq also helped the dollar as traders trimmed their safe-haven holdings in gold, U.S. Treasuries and Japanese yen.
“The dollar has moved up with higher U.S. yields. The market also seemed a bit more relaxed today about Iraq,” said Martin Schwerdtfeger, currency strategist at TD Securities in Toronto.
Benchmark 10-year Treasuries yield edged up 2 basis points to 2.64 percent, within the trading range established two weeks ago.
Analysts downplayed the greenback’s bounce on light trading volume and the absence of fresh U.S. economic data.
The dollar was poised for its worst week since early May against a basket of currencies after the Federal Reserve downgraded its long-term U.S. growth outlook and Fed Chair Janet Yellen’s perceived dovish policy stand this week.
The dollar index was last up 0.16 percent at 80.444, shaving its weekly loss to 0.2 percent which was on track for its biggest one-week drop since the week ended May 2.
The U.S. currency was last up 0.2 percent against the yen at 102.12 yen, while the euro slipped 0.2 percent to $1.3578 .
Sterling hovered within striking distance of Thursday’s 5-1/2-year high of $1.7064 after data showed U.K. factory orders grew at their fastest pace in six months in June. The report highlighted the probability that the BoE may raise rates well before the Fed.
“Sterling is a favorite right now, and the BoE seems to be the only major central bank that is likely to deliver on higher rates,” said Niels Christensen, an FX strategist at Nordea in London.
Analysts projected the BOE will likely raise policy rates in the first quarter of 2015 while the Fed will follow suit in the second half of next year.
This view raised the yield premium on two-year British Gilts over two-year U.S. Treasuries to 0.44 percent, a level not seen since August 2011.
The pound dipped 0.1 percent versus the dollar at $1.7019 and 0.07 percent against the euro at 79.78 pence. (Additional reporting by Anirban Nag in London and; Shinichi Saoshiro in Tokyo; Editing by James Dalgleish)