FOREX-Dollar steady, yen hovers near 5-month low on BOJ caution

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Little respite for yen from intervention warnings

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Dollar buoyed by Fed signals for slow pace of easing in 2025

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Forex trading subdued with many investors away for holidays

(Updates in European morning trade)

By Kevin Buckland and Greta Rosen Fondahn

TOKYO, Dec 27 (Reuters) - The dollar firmed on Friday at the end of a holiday-thinned trading week, while the yen hovered near a five-month low as traders chewed over contrasting messaging from a hawkish U.S. Federal Reserve and a cautious Bank of Japan.

Traders are now betting U.S. rates will remain elevated for longer, sending Treasury yields higher and in turn boosting the dollar against other major currencies.

The U.S. dollar index, which measures the greenback against six currencies including the yen, euro and sterling, was up 0.07% at 108.16. It has been in a holding pattern around 108 all week after hitting a two-year high last Friday at 108.54.

Fed Chair Jerome Powell said earlier this month that U.S. central bank officials would be "cautious" about further cuts following an as-expected quarter-point rate reduction.

For the month, the dollar index is up 2.2%, bringing year-to-date gains to 6.6%.

In contrast, the BOJ has taken a cautious approach to raising borrowing costs amid uncertainty over U.S. president-elect Donald Trump's economic plans. This has dragged on the yen, which hit its weakest level since July 17 on Thursday at 158.09 per dollar.

The Japanese currency got little respite from a fresh warning from the country's finance minister who said that the government "has been alarmed by foreign exchange developments ... and will take appropriate action against excessive moves".

Japanese officials have intervened in the currency market to prop up the yen this year but it remains on course for a fourth successive annual decline.

The yen traded flat at 157.79 per dollar at 0915 GMT, hovering close to Thursday's low.

A summary of opinions from the BOJ's December policy meeting released on Friday showed some officials becoming more confident about a near-term rate increase, while others remained wary amid uncertainties over the trend for wages and Trump's policies.

BOJ Governor Kazuo Ueda said last week, after the central bank held rates, that it would take "considerable time" to fully gauge the outlook for wages and overseas economies, particularly the United States.

Trump's mooted looser regulation, tax cuts, tariff hikes and tighter immigration policies are seen as both pro-growth and inflationary by economists.

The dollar is on track for a 5.4% gain against the yen this month and a 12% advance for the year.

"Several market participants signal however that the upward trend in dollar/yen may be exaggerated, which increases the risk of a correction," said Sydbank analysts in a note.

"At the same time, Japanese authorities have indicated possible intervention in the event of rapid and sharp rises in dollar/yen."

DECEMBER RETREAT

Other major currencies struggled against the stronger dollar.

The euro edged down 0.1% to $1.0411, heading for a 1.5% decline for December. Sterling was little changed at $1.2524 and on track for a 1.7% slide for the month.

The Chinese yuan was rounding out the week near a 13-month low, trading at 7.2994 per dollar in the onshore market . The currency has suffered under the threat of additional U.S. tariffs on Chinese goods under Trump.

South Korea's won dropped to a 16-year low of 1,486.7 per dollar after parliament impeached acting President Han Duck-soo, plunging the country deeper into political chaos.

Leading cryptocurrency bitcoin rose 1.3% to $97,069, but was largely flat on the month after retreating from a record high of 108,379.28 hit on Dec. 17. It has surged about 128% so far this year.

(Reporting by Kevin Buckland and Greta Rosen Fondahn; Editing by Jamie Freed, Kirsten Donovan)