TOKYO, March 17 (Reuters) The dollar hovered near a seven-week low against the euro on Friday, staying on the back foot after a soft inflation report that suggested the Federal Reserve's tightening campaign could be drawing to a close.
The dollar logged its biggest daily fall in two weeks against a basket of currencies in the previous session after the surprisingly modest reading in consumer prices and a downbeat outcome for business activity in the mid-Atlantic region.
Coming after figures earlier in the week that showed U.S. retail sales posted their first drop in six months in February, Thursday's data added to speculation that the Fed may have little reason to extend its rate-rising campaign much further.
''It's starting to look as if U.S. rates may peak by the middle of this year, which would imply that any further gains for the dollar are going to be pretty limited,'' said Katsunori Kitakura, senior forex trader at Chuo Mitsui Trust and Banking.
Fed funds futures have fully priced in a rate rise to 4.75 percent from 4.5 percent at the Fed's policy meeting later this month, but the market has been lowering the odds of further hikes in May and beyond after the run of mixed U.S. economic data.
The U.S. core consumer price index, which strips out food and energy costs, rose just 0.1 percent in February, compared with expectations of a 0.2 percent rise.
As of 0310 GMT, the euro was at $1.2170 after rising on Thursday to $1.2190 -- its highest since late January. Traders said the euro would likely challenge the $1.2200 level in the near term.
The U.S. currency was little changed at 116.85 yen, with dollar buying by Japanese importers helping to steady the currency after a modest fall on Thursday, its fourth straight session of declines.
The dollar index, a trade-weighted measure of the dollar's value against six major currencies, slid to 89.00 on Thursday, its lowest since Feb. 1.
Although the dollar still enjoys a healthy rate advantage over the euro and the zero-yielding yen, rising uncertainty about the U.S. rate outlook comes as other central banks are looking to tighten.
The European Central Bank is seen raising rates further after two quarter percentage point hikes since December, and the Bank of Japan is widely expected to bump up rates in the second half of the year after more than five years of zero rates.
And on Thursday, the Swiss National Bank tightened monetary policy, boosting its target range for the three-month Libor rate to 0.75-1.75 percent from 0.50-1.50 percent.
The Swiss franc was at 1.2905 per dollar after touching around 1.2870 on Thursday, its strongest in six weeks.
U.S. industrial production data and the University of Michigan's consumer sentiment survey are both due later on Friday, while in the euro zone, ECB Vice President Lucas Papademos is slated to chair a conference on monetary policy.
REUTERS CS VC0917