Dollar treads water, U.S. inflation data awaited for Fed direction

By Shinichi Saoshiro

TOKYO (Reuters) - The dollar trod water against a group of peers early on Friday, as currency investors remained cautious ahead of U.S. inflation data due later in the session, which is expected to set the greenback's near-term direction.

The U.S. currency's recent advance, notably against the yen, has stalled towards the end of this week as Federal Reserve Chair Janet Yellen curbed some of the monetary tightening expectations that had supported the greenback.

Signs of a pickup in U.S. inflation could reinforce views that the Fed would hike interest rates again sooner rather than later, which would lift Treasury yields and the dollar.

However, the core consumer price index (CPI) is forecast to have risen only 1.7 percent year-on-year in June after a similar gain in May. On a month-on-month basis, the core CPI is expected to rise 0.2 percent after a 0.1 percent gain the previous month.

"After their June rate hike, the Fed is seen watching inflation trends carefully before tightening policy again. So market interest towards inflation data is very high and the dollar is likely to move widely in either direction," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

The dollar index against a basket of major currencies was flat at 95.766 , poised to end the week 0.25 percent lower.

The greenback was a shade higher at 113.425 yen but still some distance away from a four-month peak of 114.495 struck on Tuesday.

The euro was flat at $1.1403 , unable to draw much lift even as Germany's 10-year bund yield climbed back above the 0.50 percent threshold overnight on a report that the European Central Bank is likely to signal in September that its asset purchase programme will be gradually wound down next year.

"The euro has become top heavy over the past few days with participants unwinding some of the bloated long positions built up recently. But the euro is still likely to begin probing highs again on speculation that the ECB would begin normalising policy," Yamamoto at Mizuho Securities said.

The common currency had set a 14-month high of $1.1489 on Wednesday on views that the ECB would begin reversing its very easy monetary policy sooner rather than later.

The Australian dollar touched a four-month peak of $0.7746 . The Aussie was on track to rise 1.7 percent on the week, lifted by an improvement in broader investor risk appetite and rise in prices of commodities, notably iron ore.

(Editing by Sam Holmes)