TOKYO: The US 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. The yen clung near three-week highs against the dollar as Japanese shares remained vulnerable, gaining limited traction from a slew of generally positive Japanese economic data. 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 $1.3039, little changed from late U.S. levels and 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 83.052 after hitting a two-week low of 82.955 on Thursday. The index has an important support level at 82.915, a 50 percent retracement of its rally earlier this month to a three-year high of 84.498. The dollar stood almost flat at 100.82 yen, unable to maintain gains made on month-end buying by Japanese importers and staying within sight of a three-week low of 100.46 yen hit on Thursday. The Nikkei average rose 1.6 percent but the broader Topix index rose just 0.5 percent, stemming the yen's gains for now. But traders say the yen could firm, 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. Some market players worry a six-month-old rally in Japanese shares, driven by hopes that radical monetary policy steps could boost the Japanese economy, may be running out of gas. "Growth strategies the government will announce next month don't look so bad but they are not that all exciting either," said Takako Masai, manager of forex at Shinsei bank. "After that, there will be no more policy drives until after the upper house election in July. So we could see more profit-taking in stocks and the dollar/yen could also go through further correction," she added. Still, many investors stick to the view that the Bank of Japan's massive stimulus will eventually boost shares, and 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. 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.

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