By Kevin Buckland TOKYO, Dec 20 Reuters - The U.S. dollar hovered near its highest point in 17 months against major peers on Monday after Federal Reserve officials signalled a first pandemic-era interest rate increase could come as early as March. After the Netherlands went into lock-down on Sunday, the euro fell sharply against the British pound as Britain's health minister refused to rule out further restrictions before Christmas due to the spread of the Omicron coronaviruses variant. Although COVID 19 restrictions can affect the outlook for economic growth, they also risk keeping inflation elevated and making central banks more hawkish. On Friday, Fed Governor Chris Waller said he thought a rate increase in March would be very likely and that the central bank could start to run down its balance sheet in mid- 2022. Mary Daly, president of the San Francisco Fed, refused to rule out a March increase and expressed support for as many as three increases next year. Ken Cheug, chief Asian foreign-exchange strategist at Mizuho Bank, said that the Fed's rapid hawkish tilt and Omicron's troubling spread have led to a risk-off mood, which led to investors to squander their capital in safe havens, including Treasuries and the dollar. The dollar index, which measures the currency against six major peers, was at 96.629, not far from last month's peak of 96.938, the highest since July 2020. The greenback has touched its highest level since December 15 against the euro, sterling and the risk-sensitive Australian dollar, although it fell against fellow haven currency, the yen, but it remains near the middle of the trading range of the past three weeks. The ten-year U.S. Treasury yields, to which the dollar-yen pair is often closely correlated, languished near a two-week low reached Friday. Money markets price about 50 - 50 odds of a quarter-point hike by March. Chris Weston, head of research at Pepperstone in Melbourne, warned that the dollar may be vulnerable to a retracement despite the tailwind from an increasingly hawkish Fed. Weston wrote in a client note that positioning is skewed long in USDs, so the prospect of position squaring into year-end is elevated. While central bank actions are the real issue, headlines on Omicron could be seen as the smoking gun for position squaring.