By Samuel Indyk and Gregor Stuart Hunter
LONDON (Reuters) - The dollar inched higher on Friday after falling the day before as a surge in U.S. jobless claims and a modest tick up in inflation kept investors zeroed in on likely Federal Reserve interest rate cuts next week and beyond.
The dollar index was up 0.1% at 97.66, having snapped a two-day winning streak on Thursday, but it was still on track to record its second consecutive weekly decline.
On Thursday, data showed the biggest weekly increase
in the number of Americans filing new applications for jobless benefits in four years.
That overshadowed U.S. consumer inflation data for August, which showed prices rising at the fastest pace in seven months but still modest and broadly in line with expectations.
While the mixed data might add some wrinkles to the Fed's policy deliberations next week, investor focus is mostly centered on rate cut prospects for now.
"The hurdle to faster cuts is labour market weakness as long as inflation stays well behaved," said Dominic Bunning, head of G10 FX strategy at Nomura.
"I still think it's a very high bar to cut by 50 basis points next week," Bunning added.
Pricing of Fed fund futures indicates that the market believes the Fed is certain to cut its key interest rate by 25 basis points (bps) on September 17.
However, traders have reined in bets on a larger 50 bps rate cut next month, with pricing implying a shallower path of easing before the end of the year than anticipated earlier, according to the CME Group's FedWatch tool.
The yield on benchmark 10-year Treasury notes rose 2 bps to 4.0338% compared with its U.S. close of 4.011%, after a decline in yields that came close to crossing the 4% mark for the first time since April.
The euro was little changed at $1.1727
The ECB kept its key interest rate on hold at 2% for a second straight meeting, with chief Christine Lagarde saying that the bank remains in a "good place" and said risks to the economy had become more balanced than before.
Fitch Ratings is expected to give its verdict on French public finances after markets close on Friday after the confidence motion on September 8.
"Fitch’s sovereign rating model is, if anything, likely to indicate a small improvement," analysts from Citi wrote in a research report.
"Going explicitly against the direction of its model and ‘manually’ downgrading the rating would require the agency to come to the conclusion that the balance of power between stakeholders of public funds has tilted further away from financial creditors since the last rating decision in spring."
Against the yen, the dollar was trading 0.4% stronger at 147.76 after the U.S. and Japanese governments issued a joint statement on Friday, which reaffirmed that exchange rates should be "market determined" and that excess volatility and disorderly moves in exchange rates were undesirable.
Sterling traded at $1.3545, slipping 0.2% after data showed the British economy stagnated in July.
The offshore yuan was last at 7.1219 yuan per dollar, weakening 0.1%, while the Australian dollar was a touch softer at $0.665 , although remained near a 10-month high.
(Reporting by Samuel Indyk and Gregor Stuart Hunter; Editing by Sam Holmes and Kim Coghill)