SINGAPORE/LONDON, July 25 (Reuters) - The dollar index steadied but was set for its biggest weekly drop in a month on Friday as investors contended with tariff negotiations and central bank meetings next week, while sterling dipped after softer-than-expected British retail sales data.
Both the U.S. Federal Reserve and the Bank of Japan are expected to hold rates steady at next week's policy meetings, but traders are focusing on the subsequent comments to gauge the timing of the next move.
Politics is a factor for both central banks, most dramatically in the U.S., where President Donald Trump once again pressed the case for lower interest rates on Thursday as he locked horns with Fed Chair Jerome Powell.
The dollar managed to recover a touch against the euro late on Thursday, however, after Trump said he did not intend to fire Powell, as he has frequently suggested he could.
"The market relief was based on the fact that Trump refrained from calling for Powell to go, although that was based on Trump's view that Powell would 'do the right thing'," said Derek Halpenny, head of EMEA research at MUFG.
He added, however, that "the theme of Fed independence being undermined by the White House will unlikely go away and remains a downside risk for the dollar".
Falls against the euro and yen leave the dollar index , which measures the dollar against six other currencies, at 97.45, on track for a drop of 0.75% this week, its weakest performance in a month, though it bounced back 0.3% on Friday.
Meanwhile, in Japan, though the trade deal signed with the U.S. this week could make it easier for the BOJ to continue rate hikes, the bruising loss for Prime Minister Shigeru Ishiba's coalition in upper house elections on Sunday complicates life for the BOJ.
Prospects of big spending could keep Japanese inflation elevated, suggesting swifter tightening, while potentially prolonged political paralysis and a global trade war provide compelling reasons to go slow on rate hikes.
On the day, the yen was softer, thanks in part to below-expectations Tokyo inflation data, with the dollar last up 0.55% at 147.8 yen, though on course for a weekly 0.7% fall.
The euro was down 0.2% at $1.1721 but set for a weekly gain of 0.8%.
CROSS-CHANNEL DIVERGENCE
The common currency took some support Thursday from the European Central Bank meeting. Policymakers left the policy rate at 2%, as expected, but the bank's relatively upbeat assessment of the economic outlook and signs that an EU-U.S. trade deal is near caused investors to reassess previous assumptions of one more rate cut this year.
"While a renewed deterioration on the trade front, or a more marked near-term fall in inflation, could still prompt the ECB to cut again, there appears to be a strong bias to keep policy on hold," said Paul Hollingsworth, head of developed markets economics, BNP Paribas Markets 360.
"We think the (easing) cycle is over."
In contrast, soft British data is supporting expectations of more Bank of England rate cuts, and causing euro zone bond yields to rise faster than British ones, supporting the euro against the pound.
The euro rose as much as 0.23% on sterling to 87.27 pence on Friday, its highest since April, building on a 0.44% gain the previous day.
Data on Friday showed British retail sales data for June slightly below analysts' expectations, albeit rebounding from a sharp drop in May, after figures on Thursday showed business activity grew only weakly in July and employers cut jobs at the fastest pace in five months.
The pound was down 0.5% on the dollar at $1.3445.
Reporting by Alun John in London and Ankur Banerjee in Singapore; Editing by Clarence Fernandez, Kevin Liffey and Helen Popper
