NEW YORK (Reuters) - The dollar weakened against the euro and yen as investors adjusted positions ahead of the weekend and next week's U.S. Federal Reserve policy setting meeting.
After last Friday's weaker-than-expected U.S. non-farm payrolls data, many traders and analysts expect the central bank to announce a modest $10 billion reduction to its $85 billion monthly bond-buying program.
"The market is definitely less concerned about tapering. The tapering is not being viewed as negatively as it was in the recent past," said Alvise Marino, currency strategist at Credit Suisse in New York.
Trading was volatile, however, with disappointing U.S. data and talk that former Treasury Secretary Larry Summers was about to be named as the next chairman of the Fed, buffeting the dollar during the early New York session.
However, as trading volumes dried up going into the weekend, the greenback lost ground against the euro and yen.
Market strategists say they are expecting anywhere from $10 billion to $15 billion less in U.S. Fed buying of government and agency debt as it starts the process of paring back the $85 billion in monthly purchases. The quantitative easing program has served to keep U.S. interest rates low in hopes of spurring borrowing and investment.
The dollar index was last at 81.451, down 0.04 percent on the day .DXY, but well off the two-week low of 81.356 set on Thursday.
The euro was up 0.05 percent at $1.3304.
Early trading was influenced by a report in Japanese business daily Nikkei saying the White House was expected to announce the Fed chairman decision after the Fed's September 17-18 meeting.
Summers is seen as less dovish than Janet Yellen, the other leading candidate to replace Ben Bernanke, whose term ends next January.
Although some traders doubted the report, it did boost the dollar and U.S. Treasury yields for a time on Friday. The dollar has since fallen back and U.S. Treasury prices are marginally higher, sending yields down. The White House said U.S. President Barack Obama had yet to make a decision on the Fed nomination.
"The dollar will appreciate in the medium term irrespective of whether it's Summers or Yellen," said Ken Dickson, investment director of currencies at Standard Life Investments in Edinburgh with $271.2 billion in assets under management. "It's fair to say the market believe Summers will be more dollar positive."
As the New York session opened, the dollar had struggled after U.S. retail sales rose less than expected in August in the latest sign that economic growth slowed in the third quarter.
Retail sales increased 0.2 percent last month as Americans bought automobiles, furniture, electronics and appliances, the Commerce Department said on Friday. Analysts had been expecting a 0.4 percent rise for the month.
A separate report showed consumer sentiment fell in September. The Thomson Reuters/University of Michigan preliminary reading on the overall index of consumer sentiment fell to 76.8 from the final August figure of 82.1.
The reports are some of the last before the Fed meets next week, when more clarity on its "tapering" plans is expected.
"It's a little piece of data that says maybe we are not ready to start slowing (asset) purchases and that's bad for the dollar," said Andrew Dilz, foreign currency trader at Tempus Inc in Washington of the retail sales report.
The Labor Department reported U.S. producer prices rose in August as energy costs rebounded, but underlying inflation remained tame.
The dollar was last down 0.24 percent at 99.30 yen, off an intraday high of 99.97 yen hit after the Nikkei report.
Earlier, the dollar rose against the yen after the Japanese government raised its view on the economy for the seventh time this year because of rising capital expenditure.
"In my view, anything that seems to edge away from deflation pressures is more negative for the yen," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
Analysts said although the dollar has recently struggled to stay above 100 yen, the uptrend was still intact.
Reporting by Nick Olivari and Daniel Bases; editing by Kenneth Barry and Chizu Nomiyama