FOREX-Dollar retreats as doubts creep in on early QE exit
* Dollar index retreats from seven-month highs
* Investors wary before U.S. inflation data
* Expectations of Fed QE exit seen by some as overdone
* Sterling gains on King comments, euro off 3-month low
LONDON, March 15 (Reuters) - The dollar fell on Friday as uncertainty crept in over whether recent strong U.S. data will be enough to prompt an early retreat from monetary easing by the Federal Reserve.
The U.S. currency was also pressured by strong gains in sterling after the Bank of England's governor suggested he did not want the UK pound to fall any further.
Analysts also said the prospect of EU leaders looking at short-term ways of boosting faltering euro zone economies may lift the euro against the dollar.
The dollar index, which measures its value against a basket of currencies, was down 0.3 percent at 82.336, off a more than seven-month peak of 83.166 reached on Thursday.
Strong jobs and retail sales data in recent days has increased optimism that the U.S. economy is on the path to recovery, potentially enabling a gradual move away from asset purchases under the Fed's quantitative easing programme.
But some analysts are unsure the Fed will step back from asset buying before the end of the year, which others in the market have been predicting. Next week's Federal Reserve meeting will give an indication of policymakers' views.
U.S. inflation data is due at 1230 GMT and a weak number may curb talk of an early QE exit, further encouraging investors to take profit on the dollar's recent rise.
"People are rethinking whether the Fed will really opt for an early exit (from monetary easing measures) as inflation is still low," said Arne Lohmann Rasmussen, head of FX research at Dankse Bank in Copenhagen.
The euro was last up 0.1 percent at $1.3012, recovering from Thursday's three-month low of $1.2911. Traders saw strong chart support at the 200-day moving average at $1.2869.
Rasmussen added the euro could recover further towards $1.32 in coming weeks. Danske Bank forecast it to rise to $1.35 in three to six months but believe this will mark its peak.
He said the euro's failure to break below $1.29 also encouraged profit-taking on dollar gains.
Analysts said the euro could face turbulence as the new Italian parliament convenes on Friday for the first time after inconclusive elections late last month.
KING TURNAROUND BOOSTS POUND
Sterling was up 0.3 percent at $1.5120, building on solid gains over the past two days after plumbing a 33-month low of $1.4832 earlier this week.
It extended gains after BoE chief Mervyn King said its decline had gone far enough, although traders did not expect the pound's rise to last long given concerns about the UK economy and speculation of more monetary easing.
The dollar held steady at 96.01 yen, with the Japanese currency helped by short covering after hefty one-way bets against the yen had built up over recent months.
The dollar has been trapped in a narrow trading range against the yen since scaling a 3-1/2-year peak of 96.71 on Tuesday. But the yen was expected to stay weak on the prospect of aggressive monetary easing in Japan.
Japan's parliament approved Prime Minister Shinzo Abe's nominee for central bank governor, Haruhiko Kuroda, and nominees for the two deputy governor posts, clearing the way for the radical monetary easing.
"What the BOJ will do should set the dollar/yen's future trading range for a long time. The range could be 86-96 yen (if the BOJ disappoints), in which case, we are now near the top of the range. Or it could be 95-105 yen," said Takako Masai, head of forex at Shinsei Bank in Tokyo.
Kuroda's pledge to "act with speed" and do whatever it takes to hit the BOJ's new inflation target has some investors speculating he may summon a meeting even before the next scheduled policy review on April 3-4.