* Dollar rises vs yen
* Sterling hits highest since Brexit vote result
* North Korea fires missile over Japan that lands in Pacific
* U.S. retail sales fall unexpectedly
* FOMC meeting in focus next week (Adds comment, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 15 (Reuters) - The dollar weakened against most major currencies on Friday, weighed down by an unexpected decline in U.S. retail sales last month that once again dimmed expectations for an interest rate increase in December.
U.S. retail sales unexpectedly fell in August as Hurricane Harvey likely depressed motor vehicle purchases, dropping 0.2 percent last month. Economists polled by Reuters had forecast retail sales nudging up 0.1 percent.
Looking ahead, the market is now focused on next week’s Federal Open Market Committee meeting, in which the Fed is expected to start reducing its balance sheet. There is, however, zero expectation for an interest rate hike.
“The Fed’s tone and stance during next week’s FOMC statement and press conference will play a major role in setting expectations for interest rates, the Fed’s balance sheet reduction plans, and the U.S. dollar going forward,” said James Chen, head of research at Forex.com in Bedminster, New Jersey.
Sterling, meanwhile, slammed the dollar as well, after a Bank of England policymaker opened the door for a possible rate increase in the coming months. That helped push the pound to its highest since the results of last June’s vote to leave the European Union, putting it on track for its best week against the dollar since October 2009.
Currency traders also brushed off the latest missile fired by North Korea in a volatile day of trading on Friday.
The dollar initially dipped against the safe-haven yen after North Korea fired a missile early on Friday that flew over Japan’s northern island of Hokkaido far over into the Pacific Ocean.
However, the yen’s fall against the dollar on Friday raised questions about investors’ willingness to buy Japanese assets when Japan is in North Korea’s firing line.
In late trading, the dollar rose 0.6 percent to 110.88 yen, posting its best weekly percentage gain since November.
Britain’s pound, meanwhile surged above $1.36 on Friday.
Sterling had already recorded its best day since April on Thursday, after investors brought forward their rate hike bets following the Bank of England’s signal that it would tighten soon.
It built on those gains on Friday after BoE policymaker Gertjan Vlieghe said “the appropriate time for a rise in Bank Rate might be as early as in the coming months.”
The euro was up 0.2 percent at $1.1940, staying below a 2-1/2-year high set last week. That pushed the dollar index to 91.868, down 0.3 percent on the day.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski