By Stanley White
TOKYO (Reuters) - The dollar traded near a two-week high versus the yen as investors pared expectations for aggressive Federal Reserve interest rate cuts ahead of key U.S. economic data due later in the day.
The euro held gains after European Central Bank (ECB) kept policy unchanged, disappointing some market participants who had bet on a possible easing. ECB President Mario Draghi also sounded more upbeat on the euro-zone economy than some investors expected, curbing speculation the bank was about to enter a prolonged easing cycle.
In addition to Draghi's comments, a bounce in Treasury yields and data on Thursday showing a surge in U.S. capital goods orders provided more reasons for traders to reconsider expectations for global monetary easing.
With no major events scheduled in Asia, investors are likely to look to U.S. economic data later in the day. The focus then shifts to Federal Reserve and Bank of Japan (BOJ) meetings next week.
The Fed is widely expected to cut rates, but there are growing views such a move may be a one-off event, not the start of a major easing cycle. The BOJ is also divided over whether to ease policy, but expectations for a move are low.
"The market had gotten ahead of itself with expectations for rate cuts, and now we are starting to correct this," said Takuya Kanda, general manager of research at Gaitame.Com Research Institute in Tokyo.
"This is supportive of the dollar. This also means it is difficult to test the euro's downside at these levels."
The dollar traded at 108.675 yen , near a two-week high of 108.755 yen. The greenback was on course for a 0.9% gain on the week, which would be its biggest since the week ending March 1.
Against a basket of six major currencies, the dollar index (DXY) was at 97.791 after reaching a two-month high of 98.173. The dollar index was up 0.7% on the week.
Data due later on Friday is expected to show U.S. economic growth slowed to 1.8% in the second quarter from 3.1% in the previous quarter, but investors will focus on consumer spending to gauge the underlying strength of the economy.
The Fed is widely expected to lower its target range of 2.25%-2.50% by 25 basis points at a meeting ending July 31, but expectations for a larger 50-basis point have waned due to positive economic data.
Before the Fed meets, the BOJ announces its policy decision on July 30. Central bank officials are divided on whether to ease policy, but some argue there is no immediate need for action as domestic demand offsets weak exports.
The euro (EUR=EBS) traded at $1.1143, a mild recovery from a two-month low of $1.1102. However, the euro was down 0.7% this week.
After the ECB meeting, Draghi indicated the bank was prepared to cut rates at its next decision in September and consider other options for easing, but his comments regarding a low risk of recession supported the euro.
Sterling changed hands at $1.2455, on course for a 0.5% weekly loss. Cable has stabilized since Boris Johnson became Britain's new prime minister, but there is still uncertainty about Britain's negotiations to leave the European Union.