* Dollar index climbs, trades above recent 7-week low
* Swedish crown falls to 2-month low vs euro after data
* Offshore Chinese yuan drops to 4-month low vs dollar
By Anirban Nag
LONDON, Feb 21 (Reuters) - The dollar rose against a basket of currencies on Friday, on track for its first weekly gain in three weeks, boosted by higher U.S. yields and data that underpinned hopes for sustained economic strengthening.
But an unexpected drop in Swedish consumer confidence knocked the crown to a two-month low against the euro and a six-week trough against the dollar. The data kept alive expectations the Riksbank may cut rates to support the economy and ward off falling price pressures.
The focus of the currency market, though, was the dollar's recovery, which in part drove the Chinese yuan to its lowest in four months in the offshore market. The number of Americans filing new claims for unemployment benefits fell last week, suggesting the labour market continues to pick up steadily despite recent severe cold weather.
Financial data firm Markit said U.S. manufacturing activity picked up pace to its fastest growth in nearly four years, although a separate manufacturing survey showed activity in the mid-Atlantic region fell to the lowest in a year.
The yield on U.S. two-year and 10-year Treasuries , which have a correlation with the dollar, climbed.
The dollar rose 0.1 percent to 80.374 against a basket of major currencies. The dollar index has regained some footing after touching a trough of 79.927 on Wednesday, its lowest level since late December.
"There have been expectations that the Fed may not taper at the same pace as before which weighed on the dollar," said Manuel Oliveri, FX strategist at Credit Agricole. "But it looks like, judging from what we saw from the Fed minutes, that data needs to deteriorate very sharply for the Fed to do that. Hence we are seeing the dollar recover."
Minutes of the Fed's Jan. 28-29 policy meeting, which was former chairman Ben Bernanke's last, showed several policy-makers wanted to emphasise that their asset-purchase programme would be trimmed in predictable, $10-billion steps unless the economy's performance surprised them in a big way.
Against the yen, the dollar edged up 0.2 percent to 102.50 yen, moving away from Thursday's intraday low of 101.67 yen. A jump in the Nikkei index also weighed on the safe-haven yen and gave the dollar an additional boost.
Traders are watching for developments from this weekend's Group of 20 meeting of finance ministers and central bank chiefs in Sydney, where global growth and recent turmoil in emerging markets are expected to be in focus.
Emerging market officials are pushing for a discussion of the impact of the Fed's stimulus withdrawal on their economies, a top Russian central banker said on Friday.
But the Fed's focus is likely to remain on U.S. economic conditions rather than the implications of tapering on emerging markets, analysts said.
Lutz Karpowitz, a currency analyst at Commerzbank said that the United States can point out that the G20 had agreed a year back that monetary policies had to be adjusted to national requirements.
"So it is unlikely that we will see any more in Sydney than promises to implement responsible monetary policy and to communicate it clearly," Karpowitz added.
Highlighting the continued sell-off in emerging markets on Friday, the Chinese yuan fell to its lowest since mid-October against the dollar in the offshore market.
The euro shed 0.1 percent to trade at $1.3705, staying below Wednesday's seven-week high of about $1.3773, with weaker than expected euro zone business surveys and data keeping alive expectations of a rate cut.
Data came in below expectations in Sweden, too, on Friday. Both consumer and manufacturing confidence fell in February, weighing on the Swedish crown. The euro rose 0.4 percent to 9.0102 crowns, its highest level in two months.