FOREX-Dollar near 3-week low vs euro as talk of Fed tapering eases
* U.S. jobless claims, housing data fall short of expectations
* Pullback in expectations that Fed could cut bond buying soon
* Yen off 3-week high on hopes of month-end flows
* Japan data generally positive, Nikkei in focus
By Hideyuki Sano
TOKYO, May 31 (Reuters) - The U.S. dollar hovered near a three-week low against the euro on Friday after unexpectedly weak U.S. economic data dampened expectations that the Federal Reserve will reduce its monetary stimulus soon.
While the yen showed little immediate response to a slew of generally positive Japanese economic data, traders were focused on whether the data would help stem a slide in Tokyo shares, which have fallen almost 15 percent since late last week.
The Nikkei average rose 1.6 percent, for now easing worries that further falls could prompt more profit-taking in dollar/yen.
U.S. data showed weekly initial jobless claims unexpectedly rose last week and pending home sales increased less than expected. The U.S. economy grew at a slightly slower pace in the first quarter than initially estimated.
"The market had gone a bit too far in expecting the Fed to taper its bond buying. The dollar may be consolidating for now," said Ayako Sera, senior market economist at Sumitomo Trust Bank.
The euro stood at $1.3041, flat from late U.S. levels but near a three-week high of $1.3062 set on Thursday.
The dollar's index against a basket of six major currencies last stood at 83.051 after hitting a two-week low of 82.955 on Thursday.
The index has an important support at 82.915, a 50 percent retracement of its rally earlier this month to a three-year high of 84.498.
The dollar gained 0.3 percent in early Asian trade to 101.02 yen, as month-end buying by Japanese importers lifted the U.S. currency off a three-week low of 100.46 yen hit on Thursday.
Still, on the month, the dollar looks on course to log its eighth consecutive month of gains versus the yen, the longest such period since 1995-96.
The yen had also come under pressure after sources familiar with the deliberations told Reuters on Thursday that Japan's Government Pension Investment Fund (GPIF) was considering a more flexible approach to allocations, which could let its investment in domestic stocks grow in rallying markets.
But analysts also noted that any change in the pension fund's investment stance will come in next year at the earliest and will have no immediate impact on the fund's investment flows.
Traders say the yen could gain, possibly beyond 100 per dollar, should Tokyo share prices slip further below their five-week low hit on Thursday.
"When Japanese shares are doing well, that would boost Japanese investors' risk appetite and encourage their foreign bond investments. When stocks are down, there will be more repatriation by the Japanese," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.
Indeed, Japanese investors posted their biggest net selling of foreign bonds in two months last week when Japanese shares started to crumble, data from Japan's Finance Ministry showed on Thursday.
Still many investors stick to the view that the Bank of Japan's massive stimulus will eventually boost shares -- and the dollar/yen -- again.
Japan's economic data pointed to a solid recovery on the whole.
Industrial output beat expectations, rising 1.7 percent in April from the previous month.
The core consumer price index in April fell 0.4 percent from a year earlier, in line with expectations.
But core CPI in Tokyo for May, a leading indicator, rose 0.1 percent, much stronger than economists' average forecast of a 0.2 percent fall. Job availability also improved to the best level since June 2008.
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