* Dollar gains vs yen on lowered expectations of Fed action * U.S. jobless claims point to healing labor market * Euro sentiment remains negative By Julie Haviv NEW YORK, Aug 16 (Reuters) - The dollar hit a one-month high against the yen on Thursday as U.S. data showed new jobless claims rose in the latest week, amid cooled expectations for further monetary easing by the Federal Reserve. The dollar pared gains after data showed the number of Americans filing new claims for jobless benefits edged higher last week. But, a trend reading fell close to a four-year low, pointing to healing in the still-struggling labor market. The pickup in hiring last month, however, along with gains in retail sales and manufacturing output, has lowered expectations the Federal Reserve could soon boost efforts to help the economy with a third round of bond purchases. Officials at the Fed next review policy on Sept. 12-13. "The market's attention is on rising US yields as the expectations for QE3 fades after a string of stronger than expected data," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. Quantitative easing is negative for the dollar as it is tantamount to printing money and dilutes its value. Lowered expectations of a third round of QE have pushed Treasury yields, which move inversely to price, higher. Higher yields have made the dollar more attractive to investors, particularly against the yen. "However the shift has been far less dollar positive than one would expect," Sutton said, who noted that since U.S. yields bottomed late last month, the Canadian dollar, Australian dollar, euro and British pound have performed well against the greenback while the yen has dropped in price. The dollar last traded at 97.16 yen, up 0.2 percent, but down from a one-month high of 79.39 hit earlier in the session. Other data showed groundbreaking on new U.S. homes fell in July in a reminder of the housing market's weakness despite some recent signs of recovery. Traders and analysts said if U.S. Treasury yields continue to rise the dollar could add to gains against the yen given the strong relationship the currency pair has with yield spreads between U.S. and Japanese government bonds. "As long as yields rise in the U.S., dollar/yen will respond," said Steve Barrow, head of G10 currency research at Standard Bank. But he said moves tend to be slow. He said the dollar could rise to 80 yen or just beyond but it was unlikely to rise further. "Even without more quantitative easing the economic backdrop in the U.S. is such that yields will stay low." The euro firmed versus the dollar, though investors stayed wary of selling it too aggressively due to expectations the European Central Bank would eventually buy bonds to reduce the borrowing costs of Spain and Italy. The euro last traded at $1.2334, up 0.4 percent on the day. The euro rose 0.7 percent against the yen at 97.70. Sentiment towards the euro remains broadly negative due to worries about euro zone debt problems, but the euro's falls are expected to be limited as investors wait to see whether the ECB takes any action next month. A Reuters poll in early August showed the ECB was seen as likely to begin buying Italian and Spanish bonds in September and to cut its main refinancing rate to a record low of 0.5 percent.

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