* Japanese inflation highest in more than 5 years
* Euro zone inflation due at 1000 GMT
* Dollar supported by month-end flows
By Laurence Fletcher
LONDON, Jan 31 (Reuters) - The yen gained ground on Friday, helped by strong Japanese inflation data and its status as a safe haven in the emerging market sell-off, while the euro was soft ahead of its own inflation readout.
The dollar edged higher against most currencies, helped by month-end flows and talk that central banks in emerging markets who intervened in the markets to prop up their currencies may buy dollars back.
Volumes were light with large parts of Asia on holiday for the Lunar New Year.
The dollar was 0.2 percent down against the yen - which has found support as a safe haven during the emerging market sell-off - at 102.55 yen, with large option expiries at the 102.25 and 103 levels, according to one trader.
The euro dropped to a new eight-week trough of 138.68 yen . Against the dollar it was marginally lower at $1.3554 .
Japan’s core consumer price inflation accelerated to 1.3 percent in January, the highest level in five years, as Japan has pursued aggressive monetary easing for more than a year to end deflation.
“This is positive news for the yen as it reduces the need for the Bank of Japan to add to its stimulus program... I expect the yen can appreciate further, however, as I do not think the emerging market crisis is over yet, just moved to a different neighborhood,” said Marshall Gittler, head of global FX strategy at IronFX Global.
The yen - last year’s weakest major currency - also rose as the Nikkei fell. The two tend to move in opposite directions, with a rally in the index often a signal for speculators to sell the yen and buy higher-yielding currencies, while that trade may be unwound when risk appetite falls.
Adam Cole, head of G10 FX strategy at RBC Capital, pointed to euro zone inflation, due at 1000 GMT, as the “pick of the numbers”.
Investors will look to the reading, which is expected to edge up to 0.9 percent year-on-year, for signs that the currency bloc is moving away from a threat of deflation as its fledgling recovery takes hold.
“It’s potentially important. If you get an undershoot, you’ll get people worrying about (a policy response),” said Cole.
The ECB holds its policy review next week, with any sign of a greater willingness to take additional easing steps seen as putting further pressure on the common currency.
There was little support for the euro ahead of the numbers, with German retail sales coming in well below forecast with a 2.5 percent fall month-on-month, compared with forecasts for a 0.2 percent rise, after German inflation on Thursday stayed subdued.
The greenback was also supported after solid U.S. October-December growth numbers revived hopes that the global economy could, on the whole, take troubles from emerging markets in its stride.
Traders said that was enough to support the view that the Federal Reserve can continue to wind down its stimulus programme, boosting the dollar’s attraction against other major currencies.
“The factors we look at suggest month-end flows are dollar-positive,” said Cole.
There was also talk in the market that emerging market central banks may buy back dollars.
“That is a possibility,” Cole added. “If you’ve seen intervention to support their currencies then they’d be recycling to replenish dollars (that they’d spent propping up their own currencies).”
The dollar index rose 0.04 percent to 81.078.