* Euro hurt by ECB head's comments on price stability
* Dollar index hits highest since March 2006
* Focus on economic, policy divergences benefits dollar
By Anirban Nag
LONDON, Jan 2 (Reuters) - The euro fell to its lowest in 4-1/2 years against the dollar on Friday after the head of the European Central Bank fanned expectations it would take bolder steps on monetary stimulus later this month.
The euro fell to $1.2035 on trading platform EBS, its lowest level since June 2010, and last traded at $1.2055, down 0.4 percent on the day.
In an interview with German financial daily Handelsblatt, ECB President Mario Draghi said the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half a year ago, underlining its readiness to act early this year should it become necessary.
"The risk is on the downside for the euro after the comments from Draghi. It could break below $1.20 since there is a risk of a very low inflation reading out of the euro zone next week," said Niels Christensen, FX strategist at Nordea.
"That will just add to pressure on the ECB to take measures when it meets later this month."
Annual euro zone inflation is due out next week and forecasters are expecting it to drop to -0.1 percent in December from 0.3 percent a month ago, taking it even further below the ECB's target of just under 2 percent.
Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore, said the euro's fall picked up momentum after triggering stop-loss orders in a thin market.
Meanwhile, the dollar hit its highest level in nearly nine years against a basket of currencies, drawing strength from the U.S. economy's outperformance and the diverging outlook for monetary policies in major economies.
The dollar kicked off 2015 on a strong note after a stellar 2014 when the index that measures the basket rose nearly 13 percent in its best yearly performance since 1997. The index rose to 90.726 at one point, its highest level since March 2006.
"Many of the themes that were in vogue heading into the end of the year, remain very much firmly in place," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
"The U.S. recovery is not stellar but it's certainly materially better than in most places in the G10."
The contrast between the Federal Reserve's path toward rate hikes and stimulative policies in Europe and Japan gave a broad boost to the dollar last year.
Against the yen, the U.S. currency rose 0.5 percent to 120.35 yen. It hit a seven-year high of 121.86 yen in early December.
(additional reporting by Masayuki Kitano; editing by John Stonestreet)