FOREX-Dollar drifts as yen set for best week in over a month

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Yen soft but hovering near one-month high

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Dollar to snap six-week winning streak on shifting rate views

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Yuan steady after GDP data meets 2024 target of 5%

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Markets await Donald Trump's return to the White House

(Updates to Asia mid-afternoon)

By Ankur Banerjee

SINGAPORE, Jan 17 (Reuters) - The yen was poised on Friday for its strongest weekly performance in over a month as expectations grow that the Bank of Japan will raise rates next week, putting the dollar on the back foot ahead of Donald Trump's return to the White House.

Remarks from BOJ officials along with Japanese data that point to persistent price pressure and strong wage growth have helped boost market confidence that a rate shift is in the offing, with traders pricing in an 80% chance of a hike next week.

Sources also told Reuters that the central bank is likely to hike rates next week barring any market shocks when U.S. President-elect Donald Trump takes office.

The yen has climbed more than 1% against the dollar this week, reversing last week's decline. It was last a tad weaker at 155.62 per dollar on Friday but still close to the one-month high of 155.10 it touched on Thursday.

"Unlike most other central banks, they (BOJ) benefit from the Fed's recent hawkish shift which means they can hike without causing too much currency volatility," said Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management.

The euro was steady at $1.02883 and sterling was little changed at $1.2210. That left the dollar index, which measures the U.S. currency against six other units, at 109.11, away from a high of more than two years touched at the start of the week.

The index is set for a drop of about 0.5% drop in the week, which would snap a six-week winning streak, after traders started pricing in the prospect of two rate cuts this year in the wake of easing U.S. core inflation data on Wednesday.

But data on Thursday showed U.S. retail sales increased in December, pointing to strong consumer demand and lending strength to the view that the Federal Reserve would be cautious in its approach to cutting rates this year. The Fed last month projected two rates in 2025.

Fed Governor Christopher Waller said on Thursday three or four rate cuts are still possible if economic data weakens further.

Markets are currently pricing in 41 basis points of cuts from the Fed this year, according to LSEG data - up from 37 basis points before Waller's comments.

The benchmark Treasury 10-year yield was at 4.612% in Asian hours. It has dropped over 16 bps this week, its weakest weekly performance in over a month.

Kieran Williams, head of Asia FX at InTouch Capital Markets, said it was too soon to dismiss chances of the dollar strengthening further, pointing to a robust U.S. economy, evolving policy expectations and a heightened tariff premium.

Investors are awaiting Trump's inauguration speech on Monday to get a better sense of his policy steps. Policies on tariffs and taxes that he has outlined so far are expected to boost growth but also be inflationary.

China's yuan was steady after data showed the world's second biggest economy grew 5.4% in the fourth quarter, significantly beating analysts' expectation and putting full-year 2024 growth at 5%, bang in the centre of Beijing's target.

Spot yuan was a tad stronger at 7.3278 per dollar, with offshore yuan last fetching 7.3429. The yuan has hovered near 16-month lows in recent days weighed down by strong dollar, U.S. tariff threats and low Chinese bond yields.

China's economy has struggled for traction since a post-pandemic rebound quickly fizzled out, with a protracted property crisis, mounting local debt and weak consumer demand weighing heavily on activity.

"We don't reckon the economy is on a strong footing despite the recent stimulus bump and more fiscal funds are likely to be deployed (in the March budget) to cushion China's economy against Trump's policies," said Alex Loo, an FX and Macro strategist at TD Securities, Singapore.

The Australian and New Zealand dollars were on track for their first weekly gain in seven on Friday. The Aussie was 0.2% lower at $0.6200, while the kiwi was at $0.5588, down 0.35% on the day.

(Reporting by Ankur Banerjee in Singapore; Editing by Edwina Gibbs and Kim Coghill)