FOREX-Euro rally wanes, US dollar at 5-week high vs yen

* Euro retreats from 6-week high vs yen
* Dollar gains vs yen after U.S. consumer sentiment survey
* Release of U.S. Fed meeting minutes anticipated

By Julie Haviv and Daniel Bases
NEW YORK, Aug 17 (Reuters) - The euro lost ground against
the U.S. dollar and held even against the yen on Friday as
investors curbed their recent enthusiasm for the single currency
ahead of upcoming events that could test their appetite for
risk.
As trading volumes dried up heading into the weekend, the
euro came off a six-week high against the yen reached earlier on
Friday. The greenback ended the week at a five week high against
the Japanese currency.
The upturn for the euro had been fueled by Thursday's
comments from German Chancellor Angela Merkel who appeared to
back European Central Bank President Mario Draghi's vow to do
all that is necessary to defend euro.
Her comments increased expectations the ECB would buy
Spanish and Italian bonds next month to lower the two countries'
borrowing costs.
"Yesterday we saw a lot of short-covering and now people are
taking profits ahead of next week, which should bring a lot of
headline risk," said Mary Nicola, foreign exchange strategist at
BNP Paribas in New York.
"Having said that, trade flow is low, so it is pretty hard
to tell a story about today's market move," she said.
Next week, euro area "flash" purchasing managers' indexes
and minutes from the last meeting of the Federal Open Market
Committee, the Fed's policy making arm, will emerge.
The euro last traded at 98.01 yen, up 0.01
percent, after hitting a global session high of 98.40, its
highest since early July. Against the dollar the euro was down
0.26 percent at $1.2322.
The dollar, meanwhile, rose to a five-week high against the
yen, with gains accelerating after a survey showed U.S. consumer
sentiment improved in early August to its highest in three
months.
For most currencies, the threat of substantial event risk
begins Aug. 31, when Federal Reserve Chairman Ben Bernanke gives
a speech in Jackson Hole, Wyoming, according to Camilla Sutton,
chief currency strategist at Scotia Capital in Toronto.
While U.S. data has improved, the factors that influence
future growth are widely negative, she said.
"Accordingly, we continue to believe that the Fed will still
look toward further policy easing," she said. "Next week's FOMC
minutes might provide some early clues."
A Reuters poll on Thursday showed economists expect the ECB
to begin buying bonds of Italy and Spain in September, and to
cut its main refinancing rate to a record low of 0.5 percent.

DOLLAR GAINS VERSUS YEN
Surprisingly strong U.S. retail sales figures earlier this
week and other better data since have tempered expectations the
Fed will launch another round of bond-buying, or quantitative
easing, as early as September. U.S. Treasury yields have risen
as a result.
The strong relationship between the performance of the
dollar against the yen and yield spreads between U.S. and
Japanese government bonds could cause
the dollar to add to its gains if U.S. yields rise further.
The dollar hit a global session high of 79.57 yen,
its strongest since mid-July. It last traded at 79.55, up 0.29
percent on the day, according to Reuters data.
"Perhaps the most important development this week has been
the rise in the 10-year US Treasury yield from 1.63 percent to
1.85 percent," said Michael Woolfolk, an FX strategist with BNY
Mellon in New York.
"This, along with the buoyancy in global equity markets
suggest that a short squeeze in risky assets may be in the works
going into US Labor Day as bets on a "prefect storm" this summer
have yet to materialize," he added.