* Muted reaction as BOJ holds policy steady as expected
* Downbeat U.S. economic data curbs speculation that Fed will hike soon
* Iraq fighting underpin traditionally safe-haven yen
* Sterling pushes to five-week highs after Carney tips higher rates
TOKYO, June 13 (Reuters) - The dollar edged up from two-week lows against the yen in Asian trading on Friday, but remained subdued as conflict in Iraq escalated and downbeat U.S. economic data gave investors no reason to believe the Federal Reserve will be raising interest rates anytime soon.
The Bank of Japan's decision to hold monetary policy steady underpinned the Japanese currency, though the outcome was widely expected and factored into positions. The BOJ tweaked up its view on overseas growth after the conclusion of the two-day meeting.
Governor Haruhiko Kuroda will hold a post-meeting news conference later on Friday, and is expected to continue to stress that Japan is making progress toward meeting the BOJ's target of 2 percent inflation during the fiscal year beginning in April 2015. His optimism on meeting the price target has led some investors to scale back bets of further monetary easing this year.
"It's very hard to find a good driver to raise dollar/yen expectations," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
"Kuroda is likely to remain optimistic, and not as many people expect more BOJ easing soon," he said.
The dollar added about 0.1 percent on the day to buy 101.79 yen, after dropping as low as 101.60 yen on Thursday. It rose to its session high of 101.83 yen before the BOJ outcome, and had little reaction the actual announcement.
The yen's traditional safe-haven status limited its losses as investors warily monitored rising conflict in Iraq. Sunni Islamist rebels surrounded the country's largest refinery on Thursday and extended their advance south toward Baghdad.
The euro also added about 0.1 percent to buy 137.99 yen.
The euro was flat from late U.S. levels against the greenback at $1.3556 , but remained not far from a four-month low of $1.3503 set last week after the European Central Bank unveiled a package of easing measures, and became the first major central bank to charge financial institutions for parking their funds with it.
In contrast to Friday's small moves, the pound gained over a cent overnight to five-week highs after Bank of England Governor Mark Carney said on Thursday that British interest rates could rise sooner than financial markets expect. The pound was last up 0.1 percent to buy $1.6945.
Carney also said the central bank would carefully weigh the merits next week of tackling housing market risks, including an undesirable loosening in mortgage underwriting standards.
LOW U.S. YIELDS UNDERMINE DOLLAR
U.S. data released on Thursday gave investors no reason to hope that the Fed would hasten to raise interest rates.
The Commerce Department said on Thursday that retail sales increased 0.3 percent in May, missing expectations for a 0.6 percent rise.
Separately, the Labor Department said initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 317,000 for the week ended June 7, exceeding expectations.
"These disappointing numbers drove the greenback lower and put pressure on Treasury yields and U.S. stocks," Kathy Lien, managing director of FX strategy for BK Asset Management, said in a note to clients.
"Yet there was no major implication for Fed policy - if anything these reports reinforce the central bank's commitment to taper slowly and their intention to leave monetary policy unchanged for a long stretch of time before raising rates," she added.
The yield on benchmark 10-year U.S. Treasuries edged up in Asia to 2.600 percent from its U.S. close of 2.586 percent, giving the dollar some respite.
The dollar index, which tracks the greenback against a basket of six major rivals, was steady on the day at 80.557.
(Editing by Shri Navaratnam and Eric Meijer)