The Japanese yen edged up slightly from five-month lows on Monday and the dollar held onto its dominant position, as global currencies headed to the end of a year characterised by diverging central bank outlooks.

The dollar index, which measures the greenback against a basket of six other major currencies, was down 0.1% at 107.86 on the day. It has kept around the 108-level after touching a two-year peak of 108.54 on Dec. 20.

Underpinned by rising U.S. yields and expectations for U.S. rates to stay higher for longer, the dollar index is up 2% in December, bringing year-to-date gains to 6.35%.

"Despite paid forecasters almost universally calling for a weaker U.S. dollar in 2024, the greenback looks set to close the year higher against all major currencies with the buck reigning supreme," Chris Weston, head of research at Pepperstone, said.

The dollar has gained in each of the last three months, with traders expecting President-elect Donald Trump's policies of looser regulation, tax cuts, tariff hikes and tighter immigration to be both pro-growth and inflationary, which will likely keep U.S. yields elevated.

U.S. 10-year Treasury yields hit a more than seven-month high last week. The yield hovered close to that mark on Monday, at 4.593%.

The yen was slowly ticking up from recent five-month lows, and strengthened 0.16% to 157.55 per dollar on Monday, with the risk of Japanese intervention preventing another test of the 160 level last seen in July.

The dollar has gained 10 yen since Dec. 3, with much of the decline in the Japanese currency coming after the Federal Reserve's Dec. 18 message of caution around future rate cuts.

That view has weighed heavily on the yen, which hit its weakest level since July 17 last week at 158.09 per dollar and has shed more than 10% so far this year, on track for a fourth yearly decline against the greenback.

It came off the July lows on Friday after a summary of opinions from the Bank of Japan's December policy meeting showed some policymakers gaining confidence in an imminent rate increase, while the Japanese central bank also cut its monthly bond purchases.

Still, Japanese yields remain notably low, and recent comments have sown doubts about the BOJ's commitment to lift rates. The BOJ held interest rates steady at 0.25% at this month's meeting, and governor Kazuo Ueda said the central bank was scrutinising more data on next year's wage momentum and clarity on the incoming U.S. administration's economic policies.

Fawad Razaqzada, market analyst at City Index, said the BOJ may be better positioned to raise rates next year, and expected the yen to rally in coming months.

"With above-target inflation remaining persistent for much of 2024, price pressures could increase further should the yen weaken even more. To support its currency, the Bank of Japan may wish to start raising rates more meaningfully," Razaqzada said.

"A potential flight to safety, a drop in U.S. bond yields, or government intervention could all help to weaken the dollar/yen in 2025."

Traders are on watch for any potential intervention by Japanese officials to shore up the currency if it continues to weaken, as they have done multiple times this year.

The country's Ministry of Finance said on Monday it had spent zero yen on currency intervention between Nov. 28 and Dec. 26.

Japan Finance Minister Katsunobu Kato on Friday reiterated concerns over a sliding yen, repeating his warning that the government would take action against excessive currency moves.

HOLIDAY TRADE

Thin year-end liquidity kept other currencies in tight ranges.

Sterling ticked up 0.12% to $1.2595, and the euro rose 0.1% to $1.0441, but both currencies were still not far from their recent troughs.

The euro is heading for a calendar-year drop of roughly 5.5% on the dollar, after the European Central Bank cut interest rates four times in 2024 and with markets expecting the ECB to take a quicker pace with rate cuts than the Fed in 2025.

The next interest rate cut by the ECB could be longer in coming after a recent uptick in inflation, ECB Governing Council member Robert Holzmann was quoted as saying on Saturday.

Bitcoin was up around 0.5% at $93,833, but is down about 3% on the month after retreating from a record high of $108,379.28 hit on Dec. 17. The cryptocurrency has surged about 120% so far this year.

(Reporting by Greta Rosen Fondahn and Vidya Ranganathan; Editing by Shri Navaratnam, Sam Holmes, Louise Heavens and Andrew Heavens)