* Dollar hits highest vs yen since July 27
* Sterling dips vs dollar after last week's rally
* Focus on Fed's Sept 19-20 policy meeting
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Sept 18 (Reuters) - The dollar hit an eight-week high against the yen on Monday, supported by a rise in U.S. Treasury yields, as traders eyed a Federal Reserve meeting starting the next day for clues on whether interest rates could rise again by year-end.
Last week was the greenback's best against the Japanese currency since November, up 2.8 percent, as a rise in U.S. yields bolstered its appeal and data showing a pick up in U.S. consumer prices helped rekindle expectations that the Fed could hike rates again in December.
It built on those gains on Monday as world stocks hit record highs, suggesting a high appetite across markets for riskier assets. The currency rose half a percent on the day to 111.43 yen as two-year Treasury yields also hit eight-week highs.
"The market is fundamentally bullish for dollar/yen, with a combination of higher risk sentiment and higher U.S. yields," said Societe Generale currency strategist Alvin Tan, adding that a holiday in Japan meant there was less yen liquidity than usual.
The focus for this week is the Fed's Sept. 19-20 policy meeting. The U.S. central bank is seen likely to announce a plan to start shrinking its balance sheet at the meeting, but is widely expected to keep interest rates unchanged for now.
Markets are pricing in a more than 50 percent chance of a Fed hike by the end of the year, however, up from only around a 40 percent chance less than a week ago, according to CME FedWatch, having brought forward their bets after a strong U.S. inflation print last week.
But although the dollar has since risen sharply versus the yen, against a basket of major currencies it gained only half a percent last week. It was 0.1 percent lower on Monday.
"The dollar-positive effect of the inflation data did not last long last week," wrote Commerzbank strategists in a note to clients. "Even though the market sees an increasing likelihood of a rate step in December ... this change of mind only refers to the most immediate Fed policy.
"The positive inflation surprise seen last week clearly is not sufficient by far to convince the market of a noteworthy continuation of the Fed rate hike cycle."
Sterling, which was also lifted across the board last week by a shift in expectations for interest rate rises, hit a 15-month high above $1.36 in early European trade before slipping back to around $1.3550 by 1105 GMT, ahead of a speech by Bank of England Governor Mark Carney.
"Any BoE-fuelled sterling rally may be on its last legs; what we have defined as a 'withdrawal of stimulus' hiking cycle is now priced into the currency," said ING currency strategist Viraj Patel.
The euro edged up 0.2 percent to $1.1967, staying below a 2-1/2 year high of $1.2092 set earlier this month. (Reporting by Jemima Kelly; Additional reporting by Masayuki Kitano in Singapore; Editing by Catherine Evans)