* Dollar trades stronger versus the euro, sterling
* Yen retreats from a 5-week low
* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh
SINGAPORE, Nov 9 (Reuters) - The dollar gained versus theeuro and sterling on Friday as the U.S. Federal Reserve keptinterest rates steady but reaffirmed its monetary tighteningstance, setting the stage for a rate hike in December.
In foreign exchange markets, investor focus is now shiftingback to the divergence between the monetary policies of theUnited States and other major economies, such as Japan whereinterest rates are seen staying extremely low. The yen, as aresult, remains near a five-week low against the dollar.
The dollar index .DXY , a gauge of its performance againstsix major peers, traded at a fresh one-week high at 96.75.
"The Fed looks set to raise rates in December. They havebeen largely unfazed by the equity market correction inOctober," said Ray Attrill, head of currency strategy at NAB.
Attrill added that the dollar strength also follows a weakeuro and a jittery sterling over the last few trading sessions.
The Fed has raised its key policy rate three times thisyear, and the market expects another rate hike in December onthe back of a robust U.S. economy, rising inflation and solidjobs growth. urn:newsml:reuters.com:*:nTLA8MEE46
According to the CME group's FedWatch tool, the likelihoodof the Fed raising rates by another 25 basis points in Decemberis 75 percent.
Analysts are also expecting more rate hikes by the Fed nextyear.
"We anticipate two more hikes in 2019: one in March and onein June," Kevin Logan, chief U.S. economist at HSBC, said in anote. The yen JPY= reversed course after hitting a five-week lowversus the dollar to trade at 111.86 on Friday.
The dollar has gained 2.24 percent versus the yen over thelast 10 trading sessions due to the diverging monetary policiesof the Fed and the Bank of Japan.
While the Fed is on track to raise interest rates, the BOJis expected to keep its ultra loose monetary policy due to lowgrowth and inflation.
The widening interest rate differential between U.S. andJapanese bonds has made the dollar a more attractive bet thanthe yen, which is often a funding currency for carry trades.
Meanwhile, the euro EUR= traded at $1.1342 on Friday,losing 0.18 percent versus the greenback. The single currencyfell 0.54 percent on Thursday as traders reacted to negativenews out of Europe.
The European Commission forecast on Thursday that theItalian economy would grow more slowly than Rome thinks in thenext two years, leading to much bigger budget deficits thanassumed by the new government. urn:newsml:reuters.com:*:nB5N1SU01F
The standoff between the EU and Rome over Italy's budgetdeficit and concerns over Europe's slowing economic growth havedragged the euro which has fallen 4.2 percent versus the dollarover the last six months.
The British pound GBP= changed hands at $1.3049 on Friday,trading marginally lower versus the dollar. Sterling has gained2.3 percent against the dollar in November.
The pound has benefited from growing investor expectationsthat Britain is close to reaching a deal with the EuropeanUnion, less than five months before it is due to exit the bloc.
The Australian dollar AUD= lost 0.21 percent to trade at$0.7241 as sentiment was dampened by worries about risingU.S.-Sino trade war tensions. China is Australia's largest tradepartner and a weakening of sentiment towards China does not bodewell for the Aussie dollar.
(Reporting by Vatsal Srivastava; Editing by Sam Holmes and EricMeijer) ((email@example.com; +65 68703571; ReutersMessaging: firstname.lastname@example.org))