FOREX-Dollar falls as Fed expectations shift
* Dollar hits two-week low against currency basket
* U.S. jobless claims fall but reading clouded by technical issues
NEW YORK, Sept 12 (Reuters) - The dollar slipped from a seven-week high against the yen and traded little changed against the euro on Thursday as U.S. bond yields declined and investors speculated the Federal Reserve will be cautious about reducing stimulus when it meets next week.
The euro recouped earlier losses it made after data showing an unexpected decline in U.S. jobless claims and a contraction in euro zone industrial output.
Analysts said the dollar could remain under pressure going into the Fed's meeting next Tuesday and Wednesday. Uncertainty about the timing and pace of Fed action grew after last week's disappointing U.S. August employment report.
Data on Thursday showing U.S. initial jobless claims fell sharply last week further clouded the picture as much of the decline appeared due to technical problems in claims processing. Before the Fed meeting, U.S. retail sales and consumer price data will be closely watched.
"Unless we get a significant new piece of information, we're going to be in this range-bound pattern, maybe with some bias for dollar weakness, as we wait for the Fed," said Vassili Serebriakov, FX Strategist at BNP Paribas in New York.
The dollar lost 0.5 percent to 99.32 yen, retreating from a seven-week high of 100.60 yen touched on Wednesday, according to Reuters data.
The euro was little changed at $1.3302, hitting a session low of $1.3259 after the U.S. claims data.
Euro zone industrial production fell 1.5 percent in July, compared with a 0.1 percent increase forecast, a sign of weak demand from European households and the shakiness of the bloc's economic recovery.
European Central Bank President Mario Draghi said Thursday that the recent rise in bank-to-bank borrowing costs was unwarranted. He took a cautious view of the recent signs of stabilization in the euro zone economy, saying the recovery was still "very, very green".
Against the yen, the euro lost 0.6 percent to 132.17 yen . Against the pound, it was trading near a recent 7-1/2-month low.
The dollar index, which measures the greenback versus a basket of six currencies, fell 0.1 percent to 81.455, having hit a two-week low of 81.356, the weakest since Aug. 28.
Markets have tempered their expectations for any aggressive stimulus withdrawal by the Fed. That has led investors to trim long dollar positions built on expectations the Fed will unwind or 'taper' its $85 billion monthly bond purchases by a much larger amount.
"It looks like the Fed will only make a modest $10 billion tapering next week. So investors are adjusting their positions accordingly," said Jane Foley, senior currency analyst at Rabobank. "The Fed will be very careful with tapering and will probably only dip its toe."
Reflecting nervousness before the Fed meeting, euro/dollar and dollar/yen one-week implied volatilities - a gauge of how sharp price swings will be in the near term - shot up.
The one-week euro/dollar implied vol was trading at around 7.65 percent, much higher than the one-month implied vol around 7.0 percent. The one-week dollar/yen implied vols at 12.65 percent were also trading above one-month implied vols of 11.8 percent.
Sterling cut losses against the dollar and hit a session high against the euro after Bank of England Governor Mark Carney showed no apparent unease over rising bond yields. Sterling was last flat at $1.5812.