NEW YORK/LONDON, July 25 (Reuters) - The Japanese yen rallied for a fourth straight session against the dollar on Thursday, hitting a 2-1/2-month high, as investors unwound their long-running bets against the currency ahead of a Bank of Japan meeting next week.
The unwinding of the short bets against the yen, the funding currency used in carry trades, came as a plunge in global stocks in recent sessions drove investors towards traditionally safe assets such as the Swiss franc and Japanese currency. U.S. equities, however, recovered on Thursday after a steep sell-off in the previous session.
In a carry trade, an investor borrows in a currency with low interest rates and invests the proceeds in higher-yielding assets.
The dollar, however, trimmed losses against the yen and euro after data showed the world's largest economy expanded faster than expected and inflation slowed in the second quarter, disputing brewing expectations of a larger than expected rate cut in September, or Federal Reserve easing at next week's meeting.
The greenback was last down 0.1% on the day at 153.63 yen .
The rate futures market has priced in a 67.2% chance that the BOJ will raise rates next week, up from about 40% earlier in the week, according to LSEG estimates.
"I think the short-covering in the yen has run its course," said Marc Chandler, chief market strategist at Bannockburn Forex in New York. "That should take pressure off the Aussie (Australian dollar) and Kiwi (New Zealand dollar), which have been pummelled this week, but also the Mexican peso."
The euro was slightly up against the dollar at $1.0852 , with the dollar index down 0.1% at 104.27 . The index was at 104.21 just before the data release.
Advance estimates showed that U.S. gross domestic product (GDP) grew at a 2.8% annualized rate in the last quarter. Economists polled by Reuters had forecast GDP rising at a 2.0% rate.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased at a 2.9% rate after surging at a 3.7% pace in the first quarter.
AHEAD OF ITSELF
"The market got ahead of itself on Fed cuts. Before the GDP number, the market is pricing as if the Fed is going to cut 50 basis points in September," Chandler said.
He also cited comments from former New York Fed President Bill Dudley in a Bloomberg column on Wednesday, who said the Fed should cut rates next week, citing recent employment data.
"But the GDP number shows that the Fed is not under that kind of urgency," Chandler said. "The market is pricing a less than 10% chance of a cut next week."
The Fed remains firmly on track to cut interest rates at September, according to fed funds futures data. The futures market has also priced in about 70 basis points (bps) of cuts this year, based on LSEG calculations.
U.S. jobless claims data were also consistent with a stable-economy trend.
Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 235,000 for the week ended July 20, the data showed. Economists polled by Reuters had forecast 238,000 claims for the latest week.
The only blemish, however, was the U.S. durables report, which showed durable goods orders fell 6.6% in June, compared with expectations for a 0.3% rise.
In other currencies, the Australian dollar fell to US$0.6519, its lowest since early May. It was last down 0.5% against the greenback at US$0.6547.
China's yuan rallied against the dollar, which fell to its lowest since early May at 7.234, as the yen's rally spilled over to the Chinese unit.
The rise came even as the country's central bank surprised markets for a second time this week by conducting an unscheduled lending operation on Thursday at steeply lower rates, more monetary stimulus to prop up the economy.
Reporting by Gertrude Chavez-Dreyfuss in New York and Harry Robertson in London; Additional reporting by Rae Wee in Singapore;
Editing by Alex Richardson and Mark Potter
