* U.S. jobs data key event risk for day
* Dollar firm on economic data, rate hike expectations
* Sterling biggest loser in FX markets
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Oct 6 (Reuters) - The dollar edged higher on Friday and is on track for its fourth consecutive week of gains as investors continued to cut their short bets against the greenback on a growing view that bond markets have underpriced the extent of U.S. rate increases.
Outflows from U.S. Treasury bonds picked up pace and the U.S. bond yield curve steepened, prompting the dollar to extend its near 3 percent rise over the last month against a broad-trade weighted basket of currencies
"We are thinking that the dollar bounce has further to go because in our view, the market continues to underprice the possibility of a December fed hike, so the dollar has further to go," said Alvin Tan, am FX strategist at Societe Generale in London.
Solid U.S. economic data, along with the prospect of U.S. tax cuts and growing expectations that a hawkish candidate will replace Janet Yellen as Federal Reserve Chair when she steps down in February 2018, have combined to given a lift to the dollar in recent weeks. [nL4N1MF3AX
The dollar index, which measures the greenback's value against a basket of six major currencies, edged up 0.1 percent to 94.03.
It rose to 94.112 at one point on Friday, its strongest level since mid-August and has risen more than 3 percent from 2-1/2 year low of 91.011 hit in early January.
Bank of America Merrill Lynch strategists say latest flow data in the week of Oct. 5 shows that Fed rate hike expectations have caused a broad rotation from U.S. Treasury debt to investment grade bonds. The former saw their biggest weekly outflows in 31 weeks.
The U.S. Treasury yield curve has also steepened in recent weeks, with yields on debt maturing in 5 to 10 years rising between 20-30 basis points in that period, indicating rate hike expectations are gradually becoming more broad-based.
"Some very short positions are being reduced as markets are coming around to the view that the bond markets are not reflecting the likelihood that the Fed may raise interest rates more than what is currently reflected," said Thu Lan Nguyen, an FX strategist at Commerzbank AG in Frankfurt.
The latest Reuters poll this week showed the greenback will at best be where it is now in three, six, and 12 months as predictions were largely unchanged, suggesting the current rally will mostly be short-lived.
But some traders believe the current dollar rally may have more legs if President Donald Trump appoints a hawkish U.S. Federal Reserve chair.
Oxford Economics assigns a 40 percent probability to Kevin Warsh as the next U.S. Federal Reserve Chair, a candidate increasingly perceived as hawkish by the markets.
But futures markets are giving only a 40 percent probability to two rate hikes over the next 12 months, a likelihood that may change dramatically and kick U.S. Treasury yields and the greenback higher if the data improves.
The last time the dollar enjoyed a four-week rising streak was back in late-February when expectations of major U.S. tax reforms were at a fever pitch, but the dollar tanked more than 10 percent in the subsequent months as those expectations faded.
The short-term focus is on U.S. job data for September, due later on Friday. The data is expected to show a slowdown in jobs growth, reflecting the effects from Hurricane Harvey and Irma.
According to a Reuters survey of economists, the jobs data will likely show that nonfarm payrolls increased by 90,000 jobs last month after rising by 156,000 in August.
Elsewhere, sterling fell 0.4 percent to one-month lows in early trade to $1.3063 as investors worried about rising political uncertainty.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Saikat Chatterjee; Additional reporting by Fanny Potkin; Editing by Gareth Jones