TOKYO, Sept 23 (Reuters) - Asian shares edged closer to 14-month highs on Friday while the dollar was on the defensive as investors grew more convinced that the Federal Reserve is settling into a phase of very gradual interest rate hikes. MSCI's broadest index of Asia-Pacific shares outside Japan was steady and within sight of its highest levels since July 2015 that it hit in early September. Japan's Nikkei dipped 0.2 percent, reflecting the yen's gains during Japan's market holiday on Thursday. On Wall Street, S&P 500 Index gained 0.65 percent, led by 1.9-percent gain for the real estate sector. The S&P 500 capped its best two-day performance in more than two months, while the Nasdaq closed at a record high. The rallies began after the Fed on Wednesday maintained the low-interest rate environment that has helped underpin the bull market for stocks since the global financial crisis in 2008. "Because the Fed is shying away from tightening, there will be liquidity sloshing around in the world's financial markets as well for another few months," said Tatsushi Maeno, senior strategist at Okasan Asset Management. Fed Chair Janet Yellen did say U.S. growth was looking stronger and rate increases would be needed to keep the economy from overheating and fuelling high inflation. But that hardly changed the market's perception on the outlook of the Fed's policy, with interest rate futures <0#FF:> pricing in roughly 60 percent chance of a rate increase by December, little changed from before the Fed meting. Crucially, the Fed also projected a less aggressive rise in rates next year and in 2018, fanning expectations bond yields will stay low in the foreseeable future. The 10-year U.S. Treasuries yield dropped to as low as 1.608 percent, down sharply from Wednesday's high of 1.738 percent and hitting its lowest level in almost two weeks. The German Bunds yield also fell about 10 basis points to minus 0.093 percent from plus 0.005 percent on Wednesday. The 10-year Japanese government bond yield fell 3.5 basis points to minus 0.060 percent in early Friday trade. The BOJ said on Wednesday it will seek to guide the 10-year JGB yield around zero percent in an unprecedented move but investors are left wondering exactly where and how the BOJ would be able to exert control on the bond yield. In the currency market, the dollar was softer on the Fed's policy outlook, with the dollar's index against a basket of six major currencies slipping to its lowest level in nearly two weeks on Thursday. The index last stood at 95.350, off Thursday's low of 95.048 but down 0.7 percent on the week. The euro fetched $1.1211, recovering from Wednesday's three-week low of $1.1123. The yen stepped back to 100.78 to the dollar from four-week high of 100.10 touched on Thursday after Japan's top currency diplomat warned Tokyo will take action if needed. Oil prices rallied to a two-week high, helped by U.S. government data that showed a surprising crude inventory drop. But they gave back some gains after Reuters reported that a two-day expert-level meeting of the Organization of the Petroleum Exporting Countries on production cooperation had yielded no major breakthrough. The meeting was held in advance of Sept. 26-28 talks in Algeria between OPEC and other major oil producers to discuss a potential output freeze. Brent crude futures traded at $47.38 per barrel, after having climbed to $47.83 on Thursday. Elsewhere, copper rallied to a six-week high despite worries about slow demand growth, supported by the Fed's policy.