* Dollar bolstered vs yen on expectations of yielddifferentials
* Dollar index holds near nine-month low
By Lisa Twaronite
TOKYO, Oct 25 (Reuters) - The dollar struggled near atwo-year low against the euro in early Asian trade on Friday, asstrengthened expectations the U.S. Federal Reserve will maintainits asset purchases through early next year undermined thegreenback.
But the dollar was underpinned against the yen on the viewthat the yield differential between Japanese government bondsand U.S. Treasuries will make dollar-denominated assets moreattractive to Japanese investors.
The euro was steady from U.S. levels at $1.3802, notfar from a two-year high of $1.3825 touched on Thursday,according to Reuters data.
The single currency shrugged off data showing the pace ofgrowth in euro zone business unexpectedly eased this month asglobal data suggested the recovery remains fragile elsewhere aswell, with U.S. manufacturing output dropping for the first timein four years.
The dollar added 0.1 percent against the yen to 97.39 yen, edging away from a two-week low of 97.13 yen hit on Wednesday.
Against a basket of currencies, the dollar was nearly flatat 79.189, but still not far from a near nine-month lowof 79.081.
The 10-year U.S. Treasury yield fell to athree-month low on Wednesday after a disappointing U.S. jobsreport vanquished any hope that the Fed would taper its stimulusthis year.
But the 10-year Japanese government bond yield wallowed at even lower levels, breaking below0.60 percent on Thursday for the first time since May 9.
"As the JPY weakening trend strengthened over the past year,the main JPY sellers have been foreign investors, especiallyhedge funds," said Citi forex strategists in a research note.
These early bets that Japanese investors would increaseoverseas investments failed to materialize, as Japanese yields did not fall enough to raise the appeal of overseas investments,and institutions instead repatriated funds.
"Now that JGB yields are passing the 'yield threshold' weare seeing an increasing likelihood that Japanese investors willfinally invest more overseas," the Citi strategists said.
Data on Friday suggested the Bank of Japan's massive easingscheme is helping the economy escape from deflation, though italso underscored that the central bank is still far from meetingits target of two percent inflation.
Japan's core consumer prices rose 0.7 percent in Septemberfrom a year earlier, holding near the fastest growth rate inalmost five years.
The U.S. central bank will meet next Tuesday and Wednesday,and it is seen as unlikely to reduce monthly bond purchasesunder its quantitative easing scheme until March 2014.