Dollar on back foot as surging jobless claims firm up Fed rate cut views

• Cracks appearing in labour market give green light to US central bank
• Euro awaits Fitch verdict on French finances

By Gregor Stuart Hunter

SINGAPORE, Sept 12 (Reuters) - The dollar regained some strength but remained under pressure on Friday as a surge in U.S. jobless claims and a modest tick up in inflation kept investors zeroed in on likely Federal Reserve interest rate cuts next week and beyond.

The dollar index =USD was last trading up 0.1% at 97.643, having snapped a two-day winning streak on Thursday and on track to record its second consecutive weekly decline.

On Thursday, data showed the biggest weekly increase in the number of Americans filing new applications for jobless benefits in four years.

That overshadowed U.S. consumer inflation data for August, which showed prices rising at the fastest pace in seven months but still modest and broadly in line with expectations.

While the mixed data might add some wrinkles to the Fed's policy deliberations next week, investor focus is mostly centred on rate cut prospects for now.

"We're quite betwixt and between, and the outlook is quite murky," said Tim Kelleher, head of institutional FX Sales at Commonwealth Bank in Auckland. "The market is at a crossroads."

The yield on benchmark 10-year Treasury notes US10YT=RR edged up to 4.0338% compared with its U.S. close of 4.011%, after a decline in yields that came close to crossing the 4% mark for the first time since April.

Pricing of Fed fund futures indicates that the market believes the Fed is certain to cut its key interest rate by 25 basis points (bps) on September 17 as labour market softness overshadows inflation risks.

However, traders are reining in bets on a jumbo 50 bps rate cut next month, with pricing implying a shallower path of easing before the end of the year than anticipated earlier, according to the CME Group's FedWatch tool.

The euro stood at $1.1724 EUR=, weakening 0.1% so far in Asia as traders curbed their bets on another European Central Bank rate cut this cycle, now seeing another move as a coin toss, after the bank sounded sanguine about the economic outlook.

Euro zone rate setters kept their key interest rate on hold at 2% for a second straight meeting, with ECB chief Christine Lagarde saying that the bank remains in a "good place" and said risks to the economy had become more balanced than before.

Fitch Ratings is expected to give its verdict on French public finances after markets close on Friday after the confidence motion on September 8.

"Fitch’s sovereign rating model is, if anything, likely to indicate a small improvement," analysts from Citi wrote in a research report.

"Going explicitly against the direction of its model and ‘manually’ downgrading the rating would require the agency to come to the conclusion that the balance of power between stakeholders of public funds has tilted further away from financial creditors since the last rating decision in spring."

The Australian dollar was last holding steady at $0.666 AUD=D3, trading near a 10-month high, while the kiwi slipped 0.1% to $0.5968 NZD=D3.

"AUD has seen strong interest from the hedge fund community over the last few sessions, however trading is more reflective of a USD selling narrative," said Troy Fraser, head of FX Sales at Citi Australia and New Zealand. "The recent PPI data and weaker jobs data in the U.S. helped reassure markets that a September rate cut by the Fed is firmly in play."

Against the yen, the dollar was trading 0.2% stronger at 147.50 yen JPY= after the U.S. and Japanese governments issued a joint statement on Friday, which reaffirmed that exchange rates should be "market determined" and that excess volatility and disorderly moves in exchange rates were undesirable.

Sterling traded at $1.3557 GBP=D3, slipping 0.1%, while the offshore yuan was last at 7.1170 yuan per dollar CNH=, weakening 0.1%.