Dollar steady after strong U.S. data, yen set for weekly gain

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By Harry Robertson and Rae Wee

LONDON/SINGAPORE (Reuters) - The dollar fluctuated on Friday and was little changed in morning trading in London after two days of gains, as investors weighed up the outlook for interest rates following the release of stronger than expected U.S. economic data on Thursday.

The euro was up slightly against the dollar, standing 0.1% higher at $1.061, after slipping less than 0.1% on Thursday.

Meanwhle the yen was down 0.2% at 132.62 to the dollar. Yet the Japanese currency was on track for a weekly gain of around 3% after the Bank of Japan (BOJ) tweaked a key bond market policy earlier this week.

In what has been a brutal year for global markets, the dollar has surged almost 9% as the U.S. Federal Reserve has aggressively hiked interest rates to tame inflation, luring investors back towards the country's fixed income assets.

Yet the dollar index has dropped more than 8% since hitting a 20-year high in September, with a sharp slowdown in U.S. inflation raising hopes that the Fed may soon end its tightening cycle.

However, data cast doubt on the idea of a Fed pause on Thursday. The number of Americans filing new claims for unemployment benefits increased less than expected last week, pointing to a still-tight labour market.

A second report said the U.S. economy rebounded in the third quarter at a pace faster than previously estimated.

The dollar index, which tracks the currency against major peers, was down less than 0.1% on Friday at 104.31.

"The market continues to bounce around on thoughts of what the Fed's going to do next," said Jarrod Kerr, chief economist at Kiwibank.

Kerr said investors are trying to "figure out when the last rate hike is, and at what level".

Sterling rose 0.29% to $1.207. The kiwi gained 0.51% to $0.628, while the Aussie was 0.41% higher at $0.67.

With the yen at the centre of the market's attention, data showed that Japan's core consumer inflation hit a 40-year high of 3.7% in November as companies continued to pass on rising costs to households.

The Japanese currency jumped almost 4% on Tuesday - its biggest daily rise since 1998 - after the BOJ changed a key policy, making Japanese assets look more attractive.

The central bank will now allow the 10-year bond yield to move 50 basis points either side of its 0% target, wider than the previous 25 basis point band.

"Getting to 130 (yen per dollar) is certainly possible," said Erik Nelson, macro strategist at Wells Fargo (NYSE:WFC). "But I don't have a sense that there's going to be a big rush of funds to chase this into the year end."

Nelson said that low trading volumes going into the holidays were causing currencies to fluctuate more than usual. "I don't put much weight on any of the moves we've seen in markets," he said.