* Dollar recovers after Thursday’s decline; euro slips
* U.S. inflation points to gradual rate rises
* Emerging market currencies get a breather
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tommy Wilkes and Saikat Chatterjee
LONDON, May 11 (Reuters) - The dollar consolidated gains on Friday and is set for a fourth consecutive week of gains as markets grow optimistic about the outlook for the U.S. currency in the coming weeks despite notching up some relatively quick recent gains.
While some investors have been quick to point to the widening interest rate differentials in favour of the United States as a significant factor in the dollar’s surge, the currency has essentially benefited from a broadening recovery compared with a loss of economic momentum in Europe.
That slowdown in growth has made policymakers in Europe and Britain more cautious about ending 2008 financial crisis-era policies, with bond markets gradually dialling back expectations of a UK rate hike to end-2018 while the European Central Bank is set to raise interest rates only in the second half of 2019.
“We are finally starting to see the dollar rise meaningfully and I think this move has further legs to run given the divergence in monetary policy trends between U.S. and Europe,” said SEB senior currency strategist Richard Falkenhall, who expects the euro to weaken to about $1.15.
Against a basket of its rivals, the dollar consolidated gains and was down 0.1 percent at 92.52, edging further from Wednesday’s 4-1/2-month high of 93.42.
It is on track for a fourth consecutive week of gains, its longest weekly winning streak since the fourth quarter of 2016. The dollar has risen nearly 4 percent in the last month.
Bank of America Merrill Lynch strategists said the main catalyst for the dollar’s surge was the lack of improvement in euro zone economic data prompting investors to unwind record short-dollar bets, particularly against emerging market currencies.
Positioning data shows hedge funds have reduced their net speculative short bets against the dollar by $10 billion to about $18 billion in the week of May 4 - still large by historical standards despite some softening in U.S. inflation data.
U.S. consumer prices rose less than expected in April, which would support gradual, rather than more aggressive, rate increases by the Federal Reserve.
Commerzbank strategists said the inflation data only signals a pause in the dollar’s recovery,
“The dollar’s rally is likely to have ended for now. But of course U.S. dollar strength could hardly go on as quickly and smoothly as it had done for the past weeks,” they said.
The euro edged 0.1 percent higher at $1.1935 but was off its 2018 lows of $1.1823 hit on Wednesday.
The single currency had started 2018 on a run as investors bet on a stronger euro zone economy and tighter monetary policy, but is now down year-to-date against the dollar.
The euro has so far weathered the impact from rises in Italian bond yields on signs the two anti-establishment parties could sweep to power as they made “significant steps” towards forming a government after weeks of political stalemate.
However, Italy’s next prime minister could be an independent figure who is not a member of either the anti-establishment 5-Star movement or the far-right League, and a government could be sworn in next week if all goes well, a senior 5-Star member said in a newspaper interview published on Friday.
Currency trading was generally quiet on Friday after a busy week, with most major pairs holding within small ranges.
The dollar traded flat against the yen at 109.33 yen, off its three-month top of 110.05 yen touched on May 2.
The Australian dollar, which had been hit by the loss of its long-cherished status as the highest yielding currency in the developed world as U.S. rates have risen, bounced back to $0.7558 from Wednesday’s 11-month low of $0.7413.
The dollar’s retreat should also take the heat off emerging market currencies that have been battered by worries about rising dollar costs and about capital outflows to the United States.
Political uncertainty in specific emerging markets has also hurt some emerging market currencies.
The Turkish lira, however, fell a further half a percent to 4.267 to the dollar, although that was off the record low of 4.3780 hit on Wednesday.
Additional reporting by Hideyuki Sano in TOKYO Editing by Louise Ireland