Dollar holds gains, heads for biggest weekly rise since February

SINGAPORE, May 12 (Reuters) - The U.S. dollar clung to modest gains against the euro on Friday and was headed for its biggest weekly gain since February, as uncertainty around the U.S. debt ceiling and monetary policy prompted a shift to safe havens.

Analysts said the greenback may be benefiting as debt ceiling talks progress and markets rethink the narrative that the U.S. Federal Reserve will cut interest rates by year-end.

Fed Governor Michelle Bowman said the central bank will probably need to raise rates further if inflation stays high, adding that key data so far this month has not convinced her that price pressures are receding.

"It certainly does seem like Bowman's comments this morning have added weight to the idea that the Fed will perhaps maintain that higher-for-longer stance. And that will keep yields relatively well supported," said Karl Schamotta, chief market strategist of Corpay in Toronto.

The Bank of England hiked rates 25 basis points to 4.5% on Thursday. Data on Friday showed the British economy grew 0.1% in the first quarter.

Still, the pound was down 0.2% at $1.2490, while the euro weakened 0.4% to $1.0874, a day after falling to a one-month low.

The dollar index edged up 0.3% to 102.42 early in the session, notching a weekly gain of 1.1%. It pared gains following news that May U.S. consumer sentiment slumped to a six-month low as a standoff to raise the federal government's borrowing cap fanned worries about the economic outlook.

Recent data showing a slowing economy has boosted the case that the Fed will pause hiking rates at the June meeting, but that has not hurt the dollar. Data showed U.S. consumer price index inflation cooling to 4.9% year-on-year in April. Moreover, weekly jobless claims rose more than expected.

However, analysts said markets had expected even weaker data. And worries about the U.S. debt ceiling and regional banking stress persist. PacWest Bancorp shares plunged 23% a day after the lender revealed a sharp drop in deposits.

"I guess the recent USD strength is largely driven by increased safe-haven demand in view of 'unknown unknowns,' i.e. how severe are vulnerabilities in U.S. regional banks and what might be the fallout of an escalation in the U.S. debt ceiling conflict," said Esther Reichelt, FX strategist at Commerzbank.

Given this huge uncertainty, "the dollar might be the best bet they have," she added.

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Currency bid prices at 10:30AM (1430 GMT)