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FOREX-Dollar, euro propped up by better economic data

* Upbeat U.S. employment data supports dollar vs yen

* Japan CPI as expected, muted reaction from dollar/yen

* Euro off 8-month low but longer-term view still bearish (Adds details, quotes)

By Shinichi Saoshiro

TOKYO, July 25 (Reuters) - The dollar held gains versus the yen on Friday and the euro stood steady after rebounding from an eight-month low against the greenback as data painted a brighter picture of the U.S. and eurozone economies.

The dollar was little changed at 101.76 yen after gaining more than 0.3 percent overnight to a two-week high of 101.86 after weekly U.S. filings for first-time jobless benefits fell to the lowest level since early 2006.

The greenback, which has been closely tracking U.S. debt yields, was also helped by a rise in yields after the strong employment indicator. It was poised to gain about 0.4 percent on the week against the Japanese currency but lacked the momentum to test the 102.00 threshold.

Market players said selling of yen crosses was a factor capping further advances by the dollar.

"Selling of sterling, Australian dollar and New Zealand dollar against the yen is helping prevent a further rise in dollar/yen. Profit-taking in such yen crosses is a key driver, rather than trades in dollar/yen itself," said Bart Wakabayashi, head of currencies at State Street in Tokyo.

Sterling fetched 172.90 yen, on track for a 0.15 percent loss this week. The pound has declined steadily since scaling a six-year high well above 175.00 early this month when the market was speculating on a quick Bank of England rate rise.

The Aussie, which rose to a three-week high of 96.17 yen on Thursday, fell back to 95.86.

The kiwi was headed for a 1 percent weekly loss versus the yen, suffering a sharp fall on Thursday when the country's central bank raised interest rates but said it would hold steady for a while to assess the impact.

Japanese consumer price data was in line with forecasts and the yen's reaction was muted as it did not stir expectations of further monetary easing by the Bank of Japan.

Core consumer prices rose 3.3 percent in June from a year earlier, before the effect of April's sales tax hike was stripped out, matching forecasts.

The euro held steady at $1.3464, having rebounded on Thursday from an eight-month trough of $1.3438 after stronger-than-expected German and French business activity reports slightly tempered bearish views towards the eurozone economy.

Europe is still faced with the possible fallout from any tougher sanctions on Russia.

The euro was on track to lose more than 0.4 percent on the week against the dollar, with many market participants retaining a bearish longer-term view on the common European currency.

Any targeting of Russian banks by the European Union or any other sanctions would probably weigh on a fragile economic recovery, stoking bets on even looser policy from the European Central Bank.

The ECB cut interest rates in June and has left the door open to further monetary easing, which would hurt the euro.

Currency strategists at Morgan Stanley said key pillars of support for the euro - foreign buying of eurozone equities and peripheral bonds plus diversification into the currency by central banks - were crumbling and likely to keep pushing the euro lower in the long term.

"The prospect of additional sanctions against Russia is also a potential negative factor for the euro. We do not see the euro as a safe haven from recent developments in Russia/Ukraine, especially given Europe's high level of exposure to the region," they said in a report to clients.

Sterling traded at $1.6989 after pulling back overnight from a one-month low of $1.6967 after weaker-than-expected British retail sales in June cast more doubt on the case for a swift rise in interest rates.

The market focus is now on Britain's second-quarter GDP data due at 0830 GMT.

The British economy is forecast to have grown 0.8 percent from the previous quarter and anything higher could further support sterling's bounce from the one-month trough.

(Editing by Eric Meijer and Alan Raybould)