The dollar strengthened against the low-yielding yen on Friday after the Federal Reserve reiterated its concern over persistent price pressures, suggesting little chance of an interest rate cut soon.

But the dollar struggled to gain ground against other major currencies as traders took the view that recent data showing an easing of inflation and signs of weakness in growth and housing market indicators will discourage the central bank from raising rates.

The Fed left key interest rates on hold at 5.25 percent on Thursday as expected, making it a year since rates have been stuck at that level.

The relatively neutral statement from the Fed helped depress implied volatility on currency options, which in turn emboldened investors to put on carry trades of selling low-yielding units for assets offering higher returns.

May U.S. inflation figures as measured by core personal consumption expenditures later in the day will be watched closely for clues on the Fed outlook and implications for risk appetite in currency and other financial markets.

They've moderated their language to some degree but reading between the lines they remain pretty hawkish, said Paul Mackel, senior currency strategist at HSBC, referring to the Fed's statement.

We have to monitor risky assets in general, how equities perform. We'll have a fresh way to look at things with today's core PCE number. That will be critical for the market.

Japanese equities rallied overnight and European stock markets opened higher on Friday.

At 0750 GMT the dollar was up 0.2 percent from late U.S. trade at 123.40 yen, moving towards a 4-1/2-year high of 124.14 yen hit last week on electronic trading platform EBS.

The euro was also up 0.2 percent against the yen at 165.94 yen, one yen from the all-time high of 166.95 yen hit last week according to Reuters data.

The euro was flat against the dollar at $1.3445, sterling was flat at $2.0025 and the dollar was steady against the Swiss franc at 1.2313 francs.


The Australian dollar was up 0.4 percent at $0.8500 and the New Zealand dollar was up at $0.7710.

The perkiness of the Antipodean currencies stood in contrast to the yen's continued weakness, a difference highlighted by the gaping relative interest rate differentials.

Tame Japanese inflation and manufacturing data overnight overshadowed stronger employment figures, which did nothing to strengthen investors' bets on the Bank of Japan raising rates from 0.5 percent.

Continued very low inflationary pressure and slowdown in private consumption are factors that will continue to discourage the BOJ from an early rate hike, Citi currency strategists wrote in a note on Friday.

We think that an August hike is a little too early, and that the BOJ can wait until Q4 to resume tightening. Therefore, lacking a catalyst from Japanese monetary policy, the yen is likely to remain weak in the coming months.

The focus for investors on Friday is likely to be the underlying or core U.S. PCE figures for May at 1230 GMT. Core PCE -- the Fed's preferred measure of inflation -- is expected to rise 0.1 percent on the month, the same as April's rise.

Benign readings like that will probably strengthen the belief in financial markets that the Fed is on hold for some time.

In a Reuters poll of primary dealers after the Fed's rate decision, nine out of 17 expected the central bank to stay on hold at least through this year, and an equal number said the Fed's next move would be a rate cut. Five said the Fed's next move would be a rate hike.