FOREX-Dollar edges up ahead of data, yen falters on corporate tax cut report
* Dollar gains upper hand ahead of U.S. retail sales
* Yen down on Nikkei report Abe is considering a corporate tax cut
* Muted reaction to Japan machinery orders data
TOKYO, Aug 13 (Reuters) - The dollar enjoyed a tentative recovery on Tuesday while the yen sagged on a media report Japanese Prime Minister Shinzo Abe is considering a corporate tax cut.
The dollar rose 0.3 percent in early trade to fetch 97.23 yen, extending its rebound from a seven-week low of 95.81 last Thursday.
The dollar gained overnight on rising expectations that strong U.S. data will prompt the Federal Reserve to act sooner rather than later to trim its monthly purchase of about $85 billion in bonds. The next test of this view will be Tuesday's retail sales reading, which most expect to be strong.
The catalyst for the early move on Tuesday was centered on a report by Japanese business daily Nikkei that Abe is considering a corporate tax cut as a way to offset the potential economic drag of a planned two-stage hike in the sales tax.
Investors who have been betting on Abe's success to pull Japan out of perennial deflation have long been hoping for more steps to boost the economy on top of the government's aggressive fiscal and monetary expansionary policies.
The tax cut report boosted Japanese shares and provided further support to the dollar/yen, which has had strong a correlation with Japanese equities in recent months.
Still, some traders said the reaction in the markets to the report would likely be temporary.
"At this point of time when nothing has been decided yet, how much can markets price in (the tax cut)?," said a trader at a Japanese bank.
The yen hardly reacted to data showing Japanese machinery orders fell less than expected in June.
The dollar index, which measures its value against a basket of six major currencies, rose to 81.502 from Thursday's seven-week low of 80.868.
It could gain further if the upcoming retail sales data at 1230 GMT cements expectations that the Fed will start reducing its asset purchase as early as September.
Economists polled by Reuters forecast retail sales likely grew 0.3 percent in July after a 0.4 percent increase in June.
As the dollar bounced back, the euro slipped to $1.3291 .
The single currency was also under pressure after German news magazine Der Spiegel reported on Sunday the Bundesbank was warning Greece would need more financial assistance by early next year.
Data on Monday showed the Greek economy, which was facing its sixth consecutive year of recession in 2013, had shrunk 4.6 percent in the second quarter, though economists said the figures may show that the worst of the recession may be over.
The broad U.S. dollar recovery pushed the Australian dollar down 0.2 percent to $0.9115, off a full cent from a two-week high of $0.9221 touched on Monday.