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FOREX-Dollar edges up ahead of inflation data; yen falls

* Dollar index strengthens away from 4-1/2 month lows

* Dollar at seven-week high vs yen

* China’s yuan hits new three-high high

* Graphic: World FX rates tmsnrt.rs/2RBWI5E

LONDON, May 28 (Reuters) - The dollar strengthened further on Friday following its rise from more than four-month lows in recent sessions, as investors waited for U.S. inflation data to set the currency’s direction.

The U.S. dollar index picked up in the late Asian and early European session, trading up 0.1% on the day at 90.78 at 0740 GMT.

The United States and Britain have a public holiday on Monday, meaning the dollar’s gains could be attributed to month-end demand.

Versus the yen, the dollar was near a seven-week high. The pair changed hands at 109.875, a move which prompted analysts to note Japan’s rise in unemployment, fall in consumer prices and news that the government is considering extending a state of emergency over the COVID-19 pandemic.

“But let’s not delude ourselves: all these developments will not have any effect on Japanese monetary policy,” wrote Commerzbank strategist Esther Reichelt in a note to clients.

“And as a result, it is US monetary policy and the US dollar as well as risk sentiment that primarily drive USD-JPY. Short term we might see an uptrend again but over the further course of the year we expect to see a weaker dollar and as a result lower USD-JPY levels.”

The euro was down 0.1% at $1.21875, hovering below its recent high of $1.2266, as dovish comments from European Central Bank officials sapped its momentum ahead of the policy meeting on June 10.

The New Zealand dollar, which earlier in the week jumped on the prospect of an interest rate hike by September 2022, was down 0.6% at 0.7247.

The Australian dollar was down 0.3% at 0.7722.

China’s onshore yuan hit a new three-year high, on track for its best week since November.

Chinese regulators said late on Thursday that they will crack down on manipulation of the forex market while reiterating no change to the country’s currency policy.

The British pound was down 0.2% at around $1.41835, on track for its best month versus the dollar so far this year.

A Bank of England policymaker said on Thursday that the central bank could raise interest rates as soon as the first half of next year, but is more likely to wait until later in 2022.

The number of Americans filing new claims for unemployment benefits dropped more than expected last week, data on Thursday showed.

Core personal consumption expenditures data -- an inflation report closely watched by U.S. central bankers -- is due at 1230 GMT.

U.S. President Joe Biden is set to release his first full budget since taking office in January later in the session. The New York Times reported on Thursday that Biden will seek $6 trillion in federal spending for the 2022 fiscal year.

“The market has yet to focus on the legacy of the pandemic in terms of deficits,” wrote ING strategists in a note to clients.

“Driving FX markets have been re-opening stories and whether central banks feel comfortable in discussing monetary normalization plans. Yet today should see some focus on US deficits.”

In cryptocurrencies, bitcoin was down around 4% at $37,000 while ether was down 6% at around $2,572.

Reporting by Elizabeth Howcroft, Editing by William Maclean

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