(Updates in European afternoon trade)

Dec 30 (Reuters) - The Japanese yen edged up slightly

from five-month lows on Monday and the dollar held onto its

dominant position, as global currencies headed to the end of a

year characterised by diverging central bank outlooks.

The dollar index, which measures the greenback

against a basket of six other major currencies, was down 0.1% at

107.86 on the day. It has kept around the 108-level after

touching a two-year peak of 108.54 on Dec. 20.

Underpinned by rising U.S. yields and expectations for

U.S. rates to stay higher for longer, the dollar index is up 2%

in December, bringing year-to-date gains to 6.35%.

"Despite paid forecasters almost universally calling for a

weaker U.S. dollar in 2024, the greenback looks set to close the

year higher against all major currencies with the buck reigning

supreme," Chris Weston, head of research at Pepperstone, said.

The dollar has gained in each of the last three months, with

traders expecting President-elect Donald Trump's policies of

looser regulation, tax cuts, tariff hikes and tighter

immigration to be both pro-growth and inflationary, which will

likely keep U.S. yields elevated.

U.S. 10-year Treasury yields hit a more than

seven-month high last week. The yield hovered close to that mark

on Monday, at 4.593%.

The yen was slowly ticking up from recent five-month lows,

and strengthened 0.16% to 157.55 per dollar on Monday,

with the risk of Japanese intervention preventing another test

of the 160 level last seen in July.

The dollar has gained 10 yen since Dec. 3, with much of the

decline in the Japanese currency coming after the Federal

Reserve's Dec. 18 message of caution around future rate cuts.

That view has weighed heavily on the yen, which hit its

weakest level since July 17 last week at 158.09 per dollar and

has shed more than 10% so far this year, on track for a fourth

yearly decline against the greenback.

It came off the July lows on Friday after a summary of

opinions from the Bank of Japan's December policy meeting showed

some policymakers gaining confidence in an imminent rate

increase, while the Japanese central bank also cut its monthly

bond purchases.

Still, Japanese yields remain notably low, and recent

comments have sown doubts about the BOJ's commitment to lift

rates. The BOJ held interest rates steady at 0.25% at this

month's meeting, and governor Kazuo Ueda said the central bank

was scrutinising more data on next year's wage momentum and

clarity on the incoming U.S. administration's economic policies.

Fawad Razaqzada, market analyst at City Index, said the BOJ

may be better positioned to raise rates next year, and expected

the yen to rally in coming months.

"With above-target inflation remaining persistent for much

of 2024, price pressures could increase further should the yen

weaken even more. To support its currency, the Bank of Japan may

wish to start raising rates more meaningfully," Razaqzada said.

"A potential flight to safety, a drop in U.S. bond yields,

or government intervention could all help to weaken the

dollar/yen in 2025."

Traders are on watch for any potential intervention by

Japanese officials to shore up the currency if it continues to

weaken, as they have done multiple times this year.

The country's Ministry of Finance said on Monday it had

spent zero yen on currency intervention between Nov. 28 and Dec.

26.

Japan Finance Minister Katsunobu Kato on Friday reiterated

concerns over a sliding yen, repeating his warning that the

government would take action against excessive currency moves.

HOLIDAY TRADE

Thin year-end liquidity kept other currencies in tight

ranges.

Sterling ticked up 0.12% to $1.2595, and the euro

rose 0.1% to $1.0441, but both currencies were still

not far from their recent troughs.

The euro is heading for a calendar-year drop of roughly 5.5%

on the dollar, after the European Central Bank cut interest

rates four times in 2024 and with markets expecting the ECB to

take a quicker pace with rate cuts than the Fed in 2025.

The next interest rate cut by the ECB could be longer in

coming after a recent uptick in inflation, ECB Governing Council

member Robert Holzmann was quoted as saying on Saturday.

Bitcoin was up around 0.5% at $93,833, but is down

about 3% on the month after retreating from a record high of

$108,379.28 hit on Dec. 17. The cryptocurrency has surged about

120% so far this year.