Dollar hits multi-year highs on extended Fed rally, year-end bets

NEW YORK (Reuters) - The U.S. dollar hit its highest level against major currencies in over 8-1/2 years on Friday on diverging monetary policy between the Federal Reserve and other major central banks, and bullish dollar positions heading into the end of the year.

The euro hit a 28-month low against the greenback, while the dollar hovered near a 28-month high against the Swiss franc and hit a more than one-week high against the Japanese yen on the back of the Fed signaling on Wednesday that it would likely hike rates in 2015 and looser policies in Europe, Japan and Switzerland.

"The dollar's rise is a continuation of the broad dollar strength that we've been seeing, which was further supported by the Fed announcement," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.

The dollar has gained against other major currencies on the view that expected Fed interest rate increases will boost the greenback by driving investment flows into the United States.

Strategists also said traders favored the dollar, which has risen about 12 percent against major currencies this year, on the view that the greenback is the safest position to take ahead of year-end volatility.

"These are markets that are very finicky, that can be driven by anything right now," said Axel Merk, president and chief investment officer of Palo Alto, California-based Merk Investments. "Many people want to be with the winning position."

The dollar slipped against the Russian currency, and was last down 5.69 percent at 58.40 roubles . Analysts said the decline was driven in part by a rebound in oil prices. Sales of oil and gas are Russia's chief source of export revenue.

The euro was last down 0.5 percent against the dollar at $1.2224 after hitting a 28-month low of $1.2221.

The dollar was last up 0.42 percent against the Swiss franc at 0.9840 franc, just under a 28-month high of 0.9847 touched Thursday. The dollar was last up 0.63 percent against the yen at 119.55 yen after hitting a more than one-week high of 119.62.

The U.S. dollar index <.dxy>, which measures the greenback against a basket of six major currencies, was last up 0.41 percent at 89.611. The index earlier hit 89.654, its highest since April 2006.

On Wall Street, the benchmark Standard & Poor's 500 stock index <.spx> was last up 0.68 percent.

(Reporting by Sam Forgione; Editing by James Dalgleish and Richard Chang)