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FOREX-Yen rally slackens off, all eyes on ECB meeting

* Yen pulls away from 4-mth high vs euro

* Japan core CPI up, does little to dissipate lowered BOJ easing expectations

* Revised Q1 US GDP disappoints, but shrugged off as historical (Adds Swedish crown move, new quotes, updates prices)

By Patrick Graham

LONDON, May 30 (Reuters) - The yen levelled off on Friday but still looked set to rack up its strongest gains for months after a jumbled week of currency moves that has broadly seen the dollar inch higher and the euro and sterling fall.

The Australian dollar, this week's biggest gainer among the major currency pairs, also added to some hefty gains in the previous session but was bumping up against resistance around $0.9320. Sweden's crown sank half a percent after weak growth data bolstered the case for lower interest rates.

Attention is now firmly focused on next week's European Central Bank policy meeting, expected to deliver more policy easing. It comes at a time when the conviction that the Bank of Japan would also take more action this summer has been shaken, underpinning a rise for the yen to almost four-month highs against the euro.

Likewise, while the dollar has gained this week, U.S. Treasury yields have fallen and dealers said there was talk of some substantial fund option bets on the yen strengthening to as little as 98 per dollar over the next month.

"We still have a bias towards a weaker dollar. Against the yen in particular there is still the danger of some sort of a snapback, just to clear out some stale yen shorts," Adam Cole, global head of FX strategy with RBC Capital Markets in London, said.

Those with "short" positions - or bets that the yen will weaken - have been squeezed by an almost 3-percent march higher for the Japanese currency since early April, driven in part by the fading of expectations for more easing from the BoJ.

The euro has also fallen almost 3 percent against the dollar in the past three weeks, hammered by expectations that the ECB will deliver a substantial blow by pumping more cash into the euro zone economy and lower market interest rates.

That euro move has left the market looking divided, however, on whether the single currency can fall any further, whatever the ECB does next week. Cole is one of those who believes strong action next Thursday is already fully accounted for.

"There is a risk that we see some knee jerk selling on the day but in general a negative deposit rate and some sort of credit easing by the bank are largely in the price," he said.

The euro fetched 138.385 yen in early European trade, off a four-month low of 137.98. The dollar hauled itself back from a one-week low of 101.42 to stand at 101.68.

The euro was also up 0.07 percent to $1.3611.


Volatility, the fuel for speculation on foreign exchange markets, has bumped along close to record lows this year, dampened by an extended period of ultra-low interest rates across the developed world.

Some dealers hope that the ECB meeting next week could be the trigger for a greater divergence between Europe, Japan and the United States that may finally wake investors up.

The price of an options contract betting on a sharper move within a month for the euro in response to the bank's meeting has jumped from a 7-year low of 4.800 to 5.925.

Yet many dealers say the slackening off of the pace of the euro's losses in the past week argues against any greater move after the ECB meets.

"It has been a slack year but a lot of people are beginning to wonder again if this (lack of volatility) is the new normal," said a chief dealer with one bank in London.

"In the past on action like this we would have seen the euro move down by several more big figures, but the market somehow does not have that energy." (Editing by Jane Merriman)