* Dollar trades stronger versus the euro, sterling
* Yen retreats from a 5-week low
* Euro down on Italian economy fears
By Tom Finn
LONDON, Nov 9 (Reuters) - The dollar rose towards a 16-monthhigh on Friday after the U.S. Federal Reserve kept interestrates steady and reaffirmed its monetary tightening stance,cueing up investors for a rate hike in December.
The greenback fell sharply following U.S. midterm electionson Tuesday on expectations that the outcome of the vote wouldmake further fiscal stimulus measures unlikely.
But the dollar bounced back and on Friday returned tooutperforming most major currencies, underpinned by the robustU.S. economy and rising interest rates.
"We're wary of selling the dollar too soon, because the Fedis still hiking rates into a tightening labour market and tradetensions haven't gone away," said Kit Juckes, chief FXStrategist at Societe Generale.
"The U.S.-Chinese wars of words go on, and the idea that atrade deal is almost done and will be rubber-stamped (at theG20) in Buenos Aires seems very optimistic."
The Fed is widely expected to raise interest rates inDecember, which would be its fourth hike this year.
Renewed strength in the dollar - which tends to appreciatefrom trade war tensions by acting as a safe haven - is pushingthe Chinese yuan towards 7 per dollar CNH=D3 and has seen theeuro slip towards $1.13.
In foreign exchange markets, investor focus is shifting backto the divergence between the monetary policies of the UnitedStates and other major economies.
In Japan, where interest rates are seen staying extremelylow, the yen JPY=D3 is near a five-week low against the dollarand has fallen 2.2 percent over the last 10 trading sessions.
On Friday, though, the yen reversed course to trade up 0.2percent at 111.86.
The dollar index .DXY , a gauge of its performance againstsix major peers, traded at a one-week high at 96.89, not farfrom a 16-month high of 97.2 brushed on Oct 31.
The euro EUR= traded at $1.1343, losing 0.2 percent afterfalling sharply on Thursday.
The European Commission forecast that the Italian economywould grow more slowly than Rome thinks in the next two years,leading to much bigger budget deficits than assumed by thegovernment. urn:newsml:reuters.com:*:nB5N1SU01F
A standoff between the EU and Rome over the budget deficitand concerns over the bloc's slowing economic growth havedragged on the euro, which has fallen 4.2 percent versus thedollar over the last six months.
The pound GBP=D3 changed hands at $1.3015, down 0.4percent.
The British currency has benefited recently from growinginvestor expectations that Britain is close to reaching a dealwith the EU, less than five months before it is due to exit thebloc.
The Australian dollar AUD=D3 lost 0.2 percent to trade at$0.7241. It tends to struggle when sentiment towards China -Australia's largest trade partner - weakens. (Additional reporting by Vatsal Srivastava in Singapore;editing by John Stonestreet) ((email@example.com; +44 2075427508 ; Reuters Messaging:firstname.lastname@example.org))