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FOREX-Euro set for biggest weekly drop in six weeks; U.S. data eyed

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

LONDON, Dec 8 (Reuters) - The euro fell by a third of a percent on Friday, set for its biggest weekly loss in six weeks as investors bought the dollar on expectations the Federal Reserve may signal more interest rate increases next year markets are now pricing in. The single currency fell 0.3 percent to $1.17325 on Friday and is on track to fall 1.4 percent this week, its biggest weekly decline since end-October.

"The dollar is getting a lift from the U.S. tax-reform optimism and expectations of more interest rate increases, but we have to see inflation prints come higher before market expectations start to shift," said Commerzbank AG currency strategist Thu Lan Nguyen.

U.S. Senate Republicans agreed to talks with the House of Representatives on sweeping tax legislation on Wednesday, amid early signs that lawmakers could bridge their differences and agree on a final bill before a self-imposed Dec. 22 deadline .

Forex traders were also awaiting the U.S. non-farm payrolls report later in the day, which is expected to show 200,000 new jobs were created in November, according to a Reuters poll.

Despite some solid U.S. payrolls data, hourly wage pressure, a gauge of inflationary pressures has been mostly flat so far this year. Consumer price inflation has also trended lower.

Passage of the tax bill and strong data would strengthen the case for more U.S. rate increases next year, a possibility which bond markets look unprepared for. The Fed is set to raise interest rates next week, but futures markets expect fewer than two rate increases next year.

"The market is behind the curve on interest rate hike expectations and that should start to catch up next year," said Adam Cole, chief currency strategist at RBC Capital Markets in London.

Sterling was the only exception, gaining against a swathe of currencies amid relief that Britain and the European Union had struck a deal on Friday that will allow a second phase of talks to begin on the British exit from the EU.

Britain and the EU reached an agreement on Friday to move on to talks about trade and a transition period after they outlined their separation, easing pressure on Prime Minister Theresa May .

Still, the currency trimmed some of its earlier gains as investors took profits at higher levels. Caution about the longer term outlook remained.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Reporting by Saikat Chatterjee, additional reporting by Lisa Twaronite in Tokyo, editing by Larry King)