Dollar steady as U.S. data awaited for Fed clues

TOKYO, May 31 (Reuters) The dollar held near a seven-week high against the euro on Thursday as investors awaited a slew of upcoming U.S. data that could further cool expectations for the Federal Reserve to trim interest rates later in the year.

Revised U.S. data on first-quarter growth later in the session precedes a slew of key indicators on Friday, including the May payrolls report and a snapshot of manufacturing activity that will show whether the economy is picking up.

The dollar has clawed back from a record low hit against the euro in April and a 26-year low against the pound as worries about the economy's health have eased, reducing speculation of lower rates that would erode the U.S. currency's yield appeal.

Analysts said investors remained nervous about the outlook for equity markets and the potential for another rush out of risky assets and could prompt an unwinding of carry trades, in which low-yielding currencies such as the yen are used to fund purchases of higher-yielding currencies.

''I expect the dollar to be relatively well-supported, and if risk aversion sets in, you will see the dollar gaining ground against sterling, the Aussie and currencies like that,'' said Sharada Selvanathan, a currency strategist at BNP Paribas in Singapore.

Asian stock markets bounced back about 1 percent during the day as investors took in their stride a 1 percent drop in the Shanghai Composite Index, following Wednesday's 6.5 percent slide on a stock-trading tax hike.

The euro was steady near $1.3430 after falling to $1.3406 the previous day, its weakest since mid-April. A break of $1.34 would likely trigger a deeper pull-back in the euro, traders said.

The dollar slipped to 121.55 yen from near 121.60 yen in late New York trade, partly on selling by Japanese exporters, but was still near the 3-1/2-month high of 121.89 yen struck last week.

The single European currency also dipped against the yen to 163.25 yen from 163.40 yen, holding near the all-time peak of 164.02 yen hit last week.

Minutes from the Fed's May meeting released on Wednesday showed that policymakers felt inflation was their main worry and that growth should recover as the year drags on.

The Fed has held rates steady for nearly a year at 5.25 percent even as investors had expected the housing market troubles to lead to a rate cut, and with the European Central Bank and Bank of England seen raising rates further.

The yen gave up brief gains made on Wednesday's plunge in the Shanghai stock market that stoked worries that market players would reverse carry trades, such as occured in late February.

Back then the euro and sterling plunged about 3 percent and 4 percent respectively against the yen in just a week as investors were caught off guard by the sudden spike in financial market volatility, which threatens the returns on carry trades.

REUTERS AGL PM1020