FOREX-Dollar rises, set for 5th straight weekly gain as pound, yen slip

* Dollar on track for fifth straight weekly gain

* Monetary divergence between Fed other central banks back in play Pound falls almost 1 percent after drop in PMI indexes

* Yen inches down as minds shift to BOJ meeting next week (Updates to U.S (Other OTC: UBGXF - news) . trading, new throughout, changes dateline, previous LONDON)

By Dion Rabouin

NEW YORK, July 22 (Reuters) - The dollar edged up against a basket of major currencies on Friday putting it on track for its fifth straight weekly gain as expectations of a rate increase from the Federal Reserve have come back into play while other central banks are seen cutting rates or adding stimulus.

The returning prospect of monetary policy divergence between the U.S. central bank and its global peers has buoyed the dollar in recent weeks as it trudged upward amid the global uncertainty following Britain's surprise vote to exit the European Union.

On Friday, the dollar rose 0.15 percent against its currency basket to 97.135, near a four-month high touched on Wednesday.

"Even (Taiwan OTC: 6436.TWO - news) if dollar index slips from here, I still think the real story this week is the strength of dollar index and this divergence," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman & Co.

Chandler pointed to readings on U.S. inflation, industrial production, retail sales and employment since the Brexit vote that have all beaten expectations as a leading cause for investors to price back in chances of a rate hike by the Fed.

That positive data has come as central banks in New Zealand, Australia, England, Japan and the euro zone are expected to ease monetary policy in the face of negative economic and political reports.

Sterling was hard hit on Friday as surveys suggested the British economy may start to contract after last month's Brexit vote.

The flash, or preliminary, Markit (NasdaqGS: MRKT - news) survey of purchasing managers - executives who make spending decisions at 1,250 big firms - fell by the most in its 20-year history, prompting British officials to say more easing could be imminent.

"July saw a dramatic deterioration in the economy," said Chris Williamson, Markit's chief economist. "The downturn, whether manifesting itself in order book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to Brexit."

That knocked the pound by about 1 percent across the board.

Against the dollar, sterling fell 1.04 percent to $1.3099.

The yen also weakened, weighed down by expectations that next week's Bank of Japan meeting will unveil further money-printing initiatives, despite a number of reports suggesting the bank's view on the economy had not worsened that dramatically.

The dollar rose 0.15 percent against the yen to 105.95 yen. (Editing by Dale Hudson and Bill Trott)