* Focus on Fed meeting next week

* Dollar gain sustainable in short term only -analyst

* Yen slips after BoJ meeting, but last flat vs dollar on the day

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 18 (Reuters) - The dollar posted its best daily gain in two weeks on Tuesday following a jump in benchmark U.S. Treasury yields, while the yen steadied after initially sliding as the Bank of Japan said it would stick to its ultra-loose monetary policy.

The U.S. currency also rose to a one-week high against a basket of currencies.

Investors are focused on next week's meeting of the U.S. Federal Reserve, which will likely signal that it will raise interest rates in March for the first time in more than three years. The fed funds futures 0#FF: have fully priced in the March tightening and four rate hikes in 2022.

"The Federal Reserve will have to become more hawkish with their rate statement in January's meeting following the progress made in the labour market in December and the rise in inflation to a near 40-year high," Simon Harvey, senior FX market analyst at Monex Europe, said in a research note.

"We expect this to provide a floor under the dollar, which has been under pressure over past weeks as the market starts to settle on a more balanced outlook for Fed normalisation."

As investors prepared for the possibility of the Fed being more hawkish than expected, Treasury yields jumped, with two-year yields -- which track short-term rate expectations -- crossing 1% for the first time since February 2020 US2YT=RR .

The U.S. 10-year yield also hit a two-year peak US10YT=RR of 1.856% overnight.

In line with Treasury yields, the dollar firmed against a basket of currencies, hitting a one-week peak of 95.832 =USD , and was last up 0.6% at 95.772.

Chester Ntonifor, chief foreign exchange strategist at BCA Research in Montreal, said the dollar's gains are not sustainable over the longer term, beyond three to six months.

"If the Fed is getting more hawkish than other central banks because of inflation, then there is a dissonance there because inflation is a global problem," he said.

"What the market is telling you is that the Fed will catch up to those central banks that have already hiked rates, but since inflation is a global problem, the Fed cannot hike much faster than other central banks. Therefore, the dollar's rate advantage will narrow against other currencies."

The euro hit a one-week low of $1.1319 and was last down 0.7% at $1.1325 EUR=EBS .

The currency was largely unmoved by data showing German investor sentiment hit its highest in six months in January on expectations COVID-19 cases will fall by early summer, allowing growth in Europe's largest economy to pick up.

YEN SLIPPED

The yen slid against the dollar after the Bank of Japan said it would maintain its ultra-loose monetary policy even as its global counterparts move towards exiting crisis-mode policies.

By afternoon trading, the dollar was flat against the yen at 114.61 yen JPY=EBS , having reached as high as 115.06 overnight.

The Australian dollar, meanwhile, fell 0.4% to US$0.7181 AUD=D3 , while the New Zealand dollar dropped 1.1% to US$0.6768 NZD=D3 .

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Currency bid prices at 3:44PM (2044 GMT) Description

RIC

Last

U.S. Close Pct Change

YTD Pct

High Bid

Low Bid

Previous

Change

Session

Dollar index

=USD

95.7750

95.2260

+0.59%

0.117%

+95.8320

+95.1260 Euro/Dollar

EUR=EBS

$1.1320

$1.1405

-0.75%

-0.43%

+$1.1421

+$1.1319 Dollar/Yen

JPY=EBS

114.6000

114.6100

+0.00%

-0.45%

+115.0550 +114.4550 Euro/Yen

EURJPY=

129.72

130.74

-0.78%

-0.46%

+131.1700 +129.7100 Dollar/Swiss

CHF=EBS

0.9175

0.9143

+0.35%

+0.59%

+0.9179

+0.9132 Sterling/Dollar GBP=D3

$1.3587

$1.3644

-0.41%

+0.47%

+$1.3661

+$1.3573 Dollar/Canadian CAD=D3

1.2518

1.2517

+0.00%

-1.00%

+1.2563

+1.2487 Aussie/Dollar

AUD=D3

$0.7178

$0.7211

-0.44%

-1.23%

+$0.7228

+$0.7171 Euro/Swiss

EURCHF=

1.0384

1.0426

-0.40%

+0.14%

+1.0439

+1.0386 Euro/Sterling

EURGBP=

0.8329

0.8356

-0.32%

-0.85%

+0.8378

+0.8331 NZ

NZD=D3

$0.6766

$0.6792

-0.30%

-1.07%

+$0.6807

+$0.6753 Dollar/Dollar

Dollar/Norway

NOK=D3

8.8155

8.7200

+1.15%

+0.12%

+8.8255

+8.7030 Euro/Norway

EURNOK=

9.9795

9.9458

+0.34%

-0.33%

+10.0161

+9.9313 Dollar/Sweden

SEK=

9.1444

9.0068

+0.68%

+1.40%

+9.1484

+9.0024 Euro/Sweden

EURSEK=

10.3528

10.2831

+0.68%

+1.16%

+10.3567

+10.2816

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World FX rates Link
USDJPY Link

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Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Elizabeth Howcroft in London; Editing by Ed
Osmond, Will Dunham, John Stonestreet and Jonathan Oatis