(Rewrites with updated prices, adds analyst comments; changes byline, dateline, pvs LONDON)
* Dollar breaks below 108 against the Japanese yen
* Euro hits more than 2-1/2 year high as Draghi fails to check FX
* ECB in agreement next step will be tapering bond buys - sources
* Dollar index set for biggest weekly pct decline since June
NEW YORK, Sept 8 (Reuters) - The U.S. dollar hit its lowest in more than 2-1/2 years against a basket of major rivals on Friday on reduced expectations for another Federal Reserve rate increase this year, while the euro spiked to multi-year highs in the wake of a European Central Bank meeting.
New York Fed President William Dudley, while saying in a speech Thursday that the central bank should continue gradually raising U.S. interest rates given low inflation should rebound, sounded slightly less confident than his previous hawkish comments.
The tone contributed to a push lower in safe-haven U.S. Treasury yields, which reduced demand for the dollar and knocked the greenback to a roughly 10-month low against the Japanese yen to 107.33 yen.
"What everybody is trying to do is price out any potential Fed hike for the remainder of this year," said Dean Popplewell, chief currency strategist at Oanda in Toronto, and noted that traders had read Dudley's comments as being somewhat more dovish.
The dollar index, which measures the greenback against a basket of six major rivals, hit its lowest level since January 2015 of 91.011. While the index pared losses and was last down just 0.3 percent at 91.419, it was still on course for its biggest weekly percentage decline since late June, of 1.5 percent.
The euro rose as much as 0.6 percent on the day to briefly hit its highest since January 2015 of $1.2092. While the euro pared most of its gains, leaving the currency roughly flat against the dollar at $1.2027, it was still on track for a weekly gain of 1.4 percent, putting it up more than 14 percent this year against the dollar.
ECB President Mario Draghi referred several times Thursday to the euro's strength, and said it was the main reason for a cut in the bank's 2018-19 inflation forecasts. He also indicated any winding down of its massive stimulus program was likely to be slow.
Those comments did little to deter market bulls, however, and a Reuters report that central bank officials were in broad agreement that their next step would be to reduce their bond purchases also supported the currency.
The ECB "left the mystery out there" with regard to tapering, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. "It creates a feeding frenzy, and the momentum that was there (in the euro) gets accelerated."
(Reporting by Sam Forgione; editing by Grant McCool)