Dollar slips before U.S. data, euro/yen at peak

LONDON, Dec 21 (Reuters) The dollar softened against the euro on Thursday ahead of U.S. data on growth and manufacturing that could help the market to assess whether the Federal Reserve may cut interest rates next year.

The yen hit a record low against the euro for a third consecutive day on expectations the Bank of Japan could skip raising rates to 0.5 percent in January, while euro zone rates are seen rising again in the first quarter from the current 3.5 percent.

Investors awaited the final reading of U.S. third-quarter gross domestic product at 1330 GMT and the Philadelphia Fed's manufacturing survey for December due at 1700 GMT.

''If we get a disappointing figure in the Philly Fed, it could weigh on the dollar,'' said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.

''The euro is benefiting from expectations the European Central Bank is going to raise rates further, and people are going long high-yielding currencies versus low-yielders.'' The dollar was at 118.26 yen at 0840 GMT, staying close to a six-week high just above 118.50 yen hit on Wednesday.

The euro rose 0.2 percent to $1.32, and gained a quarter percent against the yen to a record high of 156.45 yen.

Trading was quiet in the last full trading week of the year for European and U.S. markets.

''It's more pre-Christmas and options trading than anything fundamental, we are trying to go for 156.50 and then 157 (in euro/yen),'' said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.

Japanese Vice Finance Minister Hideto Fujii said on Thursday that foreign exchange rates should move in a way that reflected each nation's economic fundamentals.

The euro also hit 6-1/2 year highs against the Swiss franc for a fourth day on more bullish expectations for rates in the euro zone than in Switzerland.

U.S. DATA Focus in the GDP was on the core personal consumption expenditure (PCE), the Fed's preferred inflation gauge, which is seen rising 2.2 percent, unchanged from the first revision.

The Philly Fed survey is forecast to give a reading of 4.0 in December, from 5.1 in November.

Richmond Fed President Jeffrey Lacker is due to deliver a speech later in the session. Lacker, who was a voting member of the Fed's policy board this year, has opposed the central bank's decision to keep rates at 5.25 percent at the past four meetings.

YEN HOBBLES Traders said that the euro was the safest buy among major currencies as the European Central Bank is expected to keep raising rates after lifting them to 3.5 percent this month.

Given that U.S. rates have stalled since June and could fall next year, more ECB hikes would further erode the dollar's rate advantage over the euro, while improving the single currency's advantage over the yen.

Still, the dollar has gained this month as strong data have softened expectations the Fed could lower rates early next year.

The yen continued to feel the sting from comments by BOJ Governor Toshihiko Fukui earlier in the week that Japanese consumption and prices had weakened in past months, which market players took as a sign the central bank may hold off raising rates next month.

REUTERS CS DS1445