* Dollar bolstered vs yen on expectations of yield differentials
* Dollar index holds near nine-month low
By Lisa Twaronite
TOKYO, Oct 25 (Reuters) - The dollar struggled near a two-year low against the euro in early Asian trade on Friday, as strengthened expectations the U.S. Federal Reserve will maintain its asset purchases through early next year undermined the greenback.
But the dollar was underpinned against the yen on the view that the yield differential between Japanese government bonds and U.S. Treasuries will make dollar-denominated assets more attractive to Japanese investors.
The euro was steady from U.S. levels at $1.3802, not far from a two-year high of $1.3825 touched on Thursday, according to Reuters data.
The single currency shrugged off data showing the pace of growth in euro zone business unexpectedly eased this month as global data suggested the recovery remains fragile elsewhere as well, with U.S. manufacturing output dropping for the first time in four years.
The dollar added 0.1 percent against the yen to 97.39 yen , edging away from a two-week low of 97.13 yen hit on Wednesday.
Against a basket of currencies, the dollar was nearly flat at 79.189, but still not far from a near nine-month low of 79.081.
The 10-year U.S. Treasury yield fell to a three-month low on Wednesday after a disappointing U.S. jobs report vanquished any hope that the Fed would taper its stimulus this year.
But the 10-year Japanese government bond yield wallowed at even lower levels, breaking below 0.60 percent on Thursday for the first time since May 9.
“As the JPY weakening trend strengthened over the past year, the main JPY sellers have been foreign investors, especially hedge funds,” said Citi forex strategists in a research note.
These early bets that Japanese investors would increase overseas investments failed to materialize, as Japanese yields did not fall enough to raise the appeal of overseas investments, and institutions instead repatriated funds.
“Now that JGB yields are passing the ‘yield threshold’ we are seeing an increasing likelihood that Japanese investors will finally invest more overseas,” the Citi strategists said.
Data on Friday suggested the Bank of Japan’s massive easing scheme is helping the economy escape from deflation, though it also underscored that the central bank is still far from meeting its target of two percent inflation.
Japan’s core consumer prices rose 0.7 percent in September from a year earlier, holding near the fastest growth rate in almost five years.
The U.S. central bank will meet next Tuesday and Wednesday, and it is seen as unlikely to reduce monthly bond purchases under its quantitative easing scheme until March 2014.