FOREX-Dollar in vogue, hits 3-wk high on revived Fed rate hike expectations

* Dollar index up 0.4 percent at 3-week high, euro weakens

* Japan economy expands more than expected, dodges recession

* Dollar/yen recovers after easing on Japan GDP data

By Anirban Nag

LONDON, May 18 (Reuters) - The dollar rallied to a three-week high against the euro and a basket of currencies on Wednesday on renewed expectations that the Federal Reserve could raise interest rates soon.

U.S (Other OTC: UBGXF - news) . consumer prices recorded their biggest increase in more than three years in April as gasoline prices and rents rose, while other data showed housing starts and industrial production rebounded strongly, adding to the case for an early rate hike.

Rate futures, based on the CME's Fedwatch, moved to price in a 70 percent chance of a rate hike by December, with a 50 percent chance of a move priced in by September. The chance of a hike in June was at around 15 percent, up from around 4 percent before the data was released.

The two-year U.S. Treasury notes yield hit a three-week high of 0.847 percent.

Also, Atlanta Fed President Dennis Lockhart, viewed as a centrist on the Federal Reserve board, said he still assumed there would be two to three rate hikes this year, a view echoed by San Francisco Fed President John Williams.

The dollar index was up 0.4 percent at 94.99, its highest level since April 25. The euro slipped against the dollar to a three-week low of $1.1255 while the U.S. currency was 0.3 percent higher against the yen at 109.50 yen.

"The two-year U.S. yields seem to be breaking their recent ranges so that is helping the dollar," Yujiro Goto, currency analyst at Nomura, said. "The Fed officials also sounded a bit more hawkish about policy."

The focus now turns to the minutes from the last Federal Open Market Committee later on Wednesday. The minutes are expected to give investors some context into the discussions around the outlook for growth and inflation at the April meeting where the Fed sounded dovish about raising rates.

Earlier, the yen rose against the dollar after data showed Japan's economy unexpectedly expanded at the fastest pace in a year in the first quarter, an annualised 1.7 percent, easily beating forecasts and rebounding from a 1.7 percent contraction in the previous quarter.

But less bullish aspects of the GDP report kept alive expectations of more stimulus in coming months.

"Japan's first-quarter GDP looked positive on the headline, but the nominal growth was slightly disappointing with the GDP deflator coming in slightly lower than expected," John Hardy, head of FX strategy at Saxo Bank, said.

Some 80 percent of analysts surveyed by Reuters from May 11-17 said they expected the BOJ to take action, including a combination of cutting negative interest rates further and boosting its purchases of government bonds, exchange-traded funds and corporate bonds. (additional reporting by Lisa Twaronite; editing by John Stonestreet and Jane Merriman)