* Dollar index on track to fall 2 pct on the week
* Yen, euro, sterling headed for large weekly gains
By Shinichi Saoshiro
TOKYO, Feb 16 (Reuters) - The dollar languished near a three-year low against a basket of currencies on Friday, headed for its biggest weekly loss in nine months, as a slew of bearish factors offset support for the U.S. currency from rising Treasury yields amid firming inflation.
The dollar index against a group of six major currencies hovered just above 88.438, a three-year trough set late in January. The index was on track to lose 2 percent on the week for its largest decline since May 2017.
The U.S. currency has been weighed down by a variety of factors this year, including concerns that Washington might pursue a weak dollar strategy and the perceived erosion of its yield advantage as other countries start to scale back their easier monetary policy.
Traders also suspect that confidence in the dollar has been eroded by mounting worries over the deficit in the United States, which is projected to balloon to near $1 trillion in 2019 amid a government spending splurge and large corporate tax cuts.
“There really are no signs of the dollar recovering any time soon. Participants are bracing for dollar/yen to head towards 105 and the euro to climb past $1.25,” said Shin Kadota, senior strategist at Barclays in Tokyo.
“It’s difficult for the market to see the dollar rebounding, especially as decent U.S. fundamentals seem to be providing no support for the currency,” Kadota said.
Indeed, the dollar failed to gain momentum after data on Wednesday showed U.S. inflation was stronger than expected in January, sending Treasury yields to four-year highs, as investors bet the Federal Reserve could increase interest rates as many as four times this year.
The dollar was steady at 106.110 yen after slipping to 106.020, its lowest in 15 months. It was enroute for a weekly loss of 2.5 percent.
The euro was flat at $1.2503 and poised to gain 2 percent this week. A rise above $1.2538 would take the common currency to its highest since December 2014.
The pound was little changed at $1.4104, having risen 2 percent on the week.
The Australian dollar was a shade lower at $0.7940.
The Aussie, sensitive to shifts in risk sentiment, had slipped to near 1-1/2-month low of $0.7759 a week ago during a tumble in global equities before bouncing back. (Reporting by Shinichi Saoshiro Editing by Shri Navaratnam)