FOREX-Dollar falters on doubts over early QE exit
* Dollar index retreats from seven-month high
* Expectations of Fed QE exit seen by some as overdone
* Sterling gains on King comments, euro off 3-month low
LONDON, March 15 (Reuters) - The dollar fell on Friday as uncertainty crept in over whether recent strong U.S. economic data will be enough to prompt an early retreat from monetary easing by the Federal Reserve.
The U.S. currency was pressured by strong gains in sterling after the Bank of England's governor suggested he did not want the pound to fall any further.
The dollar index, which measures its value against a basket of currencies, was down 0.4 percent at 82.258 after touching a more than seven-month high of 83.166 on Thursday.
Strong job and retail sales figures in recent days have increased optimism that the U.S. economy is on a path to recovery, potentially enabling a gradual move away from Federal Reserve asset purchases.
But some analysts are unsure whether the Fed will step back from asset buying before the end of the year, which others in the market have been predicting. Next week's Federal Reserve meeting will give an indication of policymakers' views.
U.S. inflation data is due at 1230 GMT and a weak number may curb talk of an early QE exit, further encouraging investors to take profits on the dollar's recent rise.
"People are rethinking whether the Fed will really opt for an early exit (from monetary easing measures) as inflation is still low," said Arne Lohmann Rasmussen, head of FX research at Dankse Bank in Copenhagen.
The euro rose 0.4 percent to $1.3062, recovering from Thursday's three-month low of $1.2911. Traders saw strong chart support at the 200-day moving average at $1.2869.
Analysts said the prospect of EU leaders looking at short-term ways of boosting faltering euro zone economies by allowing more leeway on budget rules may also lift the euro against the dollar.
Danske Bank's Rasmussen said the euro could recover further towards $1.32 in coming weeks after its failure to break below $1.29 encouraged profit-taking on dollar gains.
Investors will also focus on Italy, where a new parliament convened on Friday for the first time since inconclusive elections late last month. There has been no sign of a deal to break the political deadlock, which could weigh on the euro.
KING TURNAROUND BOOSTS POUND
Sterling was up 0.5 percent at $1.5154, building on solid gains over the past two days after plumbing a 33-month low of $1.4832 earlier this week.
It extended gains after BoE chief Mervyn King said its decline had gone far enough, although traders did not expect the pound's rise to last long given concerns about the UK economy and speculation of more monetary easing.
The dollar held steady at 96.09 yen, with the Japanese currency helped by short covering after hefty one-way bets against the yen had built up over recent months.
The dollar has been trapped in a narrow trading range against the yen since scaling a 3-1/2-year peak of 96.71 on Tuesday. But the yen was expected to stay weak on the prospect of aggressive monetary easing in Japan.
"It's pretty much moved sideways over the last few days. That demonstrates, particularly in an environment where we are seeing this bigger correction (in the dollar), that the underlying trend in dollar/yen is still very strong," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"We are now looking for a move up to the 100 yen area over the course of the next few weeks."
Japan's parliament approved Prime Minister Shinzo Abe's nominee for central bank governor, Haruhiko Kuroda, and nominees for the two deputy governor posts, clearing the way for aggressive monetary easing.
Kuroda's pledge to "act with speed" and do whatever it takes to hit the BOJ's new inflation target has some investors speculating he may summon a meeting even before the next scheduled policy review on April 3-4.