FOREX-Dollar gains on yen as traders eye yield differentials
* Fed's Dudley and Powell play down worries of stimulus tapering * Quarter-end adjusting seen helping lift euro By Lisa Twaronite and Ian Chua TOKYO/SYDNEY, June 28 (Reuters) - The dollar scaled a two-and-a-half week peak against the yen in Asia on Friday, but lost ground against the euro as last minute positioning ahead of the end of the month and quarter helped the common currency. Two more Federal Reserve officials sought to play down fears over the U.S. central bank's plan to gradually reduce stimulus, but some strategists and market participants say yield differentials still favouring the dollar, compared to the yen in particular. "U.S. bond yields have come off a little bit in the last couple of days, but I think the environment we're in is still dollar-positive," said Mitul Kotecha, the global head of foreign-exchange strategy at Credit Agricole in Hong Kong. While the benchmark 10-year Treasury yield was lower on Friday, it remains not far from this week's high of 2.66 percent touched on Monday, which was its highest since August 2011. By contrast, the benchmark 10-year Japanese government bond yield has remained mired in a range between 0.8 percent and 0.9 percent in recent weeks. Japanese economic data on Friday signalled steady economic growth, but economists believe it may take more time to achieve sustained rises in prices even as the government's expansionary policies are making some progress towards ending years of entrenched deflation. Japan's consumer prices stopped falling in May and labour demand reached its strongest level in five years, but the BOJ's two-year time frame for achieving its 2 percent inflation target still appears overly ambitious. Against the yen, the dollar advanced 0.4 percent to 98.75 after rising to 99.03 yen earlier, its highest since June 11. "Dollar-yen remains unstable ahead of next week's payroll data," said Masashi Murata, senior currency strategist at Brown Brothers Harriman. But he noted that concerns about China's credit crunch were fading, as the Chinese central bank pledged to ensure reasonable lending growth and market stability. The dollar index, which tracks the greenback's performance against a basket of major currencies, edged slightly down from late U.S. levels to 82.853 , but was still not far below Thursday's high of 83.171, a peak not seen since June 3. The index was on track for its second straight week of gains and its biggest two-week rally since November 2011. The euro added 0.3 percent to $1.3064, pushing away from Wednesday's four-week trough around $1.2983. Investors turned positive on the dollar since Fed Chairman Ben Bernanke last week laid out a roadmap for scaling back its asset-buying stimulus programme if the economy continued to improve. The looming end of easy money sparked a sell-off in equities, government bonds, emerging market assets and commodity currencies. Downward revisions to U.S. first quarter gross domestic product data on Wednesday curbed the dollar's rise, suggesting that the Fed might hold off on tapering its stimulus. Central bank policymakers also sought to soothe market nerves this week. New York Fed President William Dudley and Fed Governor Jerome Powell were the latest to do so, with Dudley going as far as saying that recent market expectations for an earlier rate rise are "quite out of sync" with the statements and expectations of the policy-making Federal Open Market Committee. Sterling remained under pressure after Thursday's downward revisions to GDP, and particularly business investment, bucked the recent trend of improving data. The pound was down 0.1 percent at $1.5264, well off this month's peak of $1.5751. Data later in the day includes the Chicago PMI index, a barometer of Midwest business activity, and the final reading of U.S. consumer sentiment for June.