By Natsuko Waki
LONDON, Oct 12 - The dollar eased against major currencies on Friday as investors turned cautious ahead of a key survey due later in the session which could show how much September's attacks on the United States hurt consumer confidence.
The dollar has scooped its biggest weekly gains since May in trade-weighted terms this week as U.S. equities rebounded to pre-September 11 levels, easing pessimism about the possible fallout of the attacks on the world's biggest economy.
But U.S. equity futures showed a mix opening on Wall Street later in the day, indicating the risk remained on the downside.
"The market is comforted by how things proceeded this week and the war premium has certainly come off," Gerard Gardner, foreign exchange strategist at Morgan Stanley said.
"But I think the market is still murky and polarised because things are far from clear. Whether the dollar can sustain the rally will depend on consumer confidence data."
The dollar trimmed its gains to 121.26 having hit a one-month high of 121.74 earlier.
On the FINEX trade weighted index , the dollar has erased all its losses since September 11. It has also retraced nearly 40 percent of its drop from a 15-year high hit in early July, illustrating its broad-based recovery.
The euro won some respite but analysts say confidence in the currency was sorely tested after the European Central Bank disappointed the market by leaving interest rates steady in the previous session. The market had hoped for a cut to boost growth.
The single currency was licking its wounds against dollar at $0.9041 , having breached its key four-month trendline to hit a one-month low of $0.8984 late on Thursday. Against the yen, the euro ticked up to 109.67 from 109.52.
Dealers said some investors were buying the Swiss franc ahead of the weekend, pushing the dollar down a third of a percent to 1.6390 francs .
Analysts polled by expect the University of Michigan consumer sentiment survey for October, due at 1400 GMT, to slip further to 76.1, having fallen to 81.8 in September, its lowest level in nearly eight years.
September retail sales are also due at 1230 GMT but economists said the data may not reflect the full extent of the weakness after the September 11 attacks until they are revised next month.
WEAKER THE BETTER?
The dollar gained some support after Japan's Finance Minister Masajuro Shiokawa said he had told Prime Minister Junichiro Koizumi it might be better if the yen was slightly weaker than current levels around 120-121 to the dollar.
Analysts generally assume Japan would not be too upset if the yen weakened further, given that Japan's hard-pressed exporters could do with the help.
But they also recognise a rapid and substantial rise in the dollar may cause friction with Japan's Asian trading partners, which would worry the authorities.
"Of course you want the weaker yen for Japanese exporters but driving the yen too low will upset Asian countries. So I would say 120-123 would be a comfortable level for the authorities," a London-based Japanese dealer said.
The Bank of Japan left its monetary policy unchanged on Friday as expected, leaving the official discount rate at 0.10 percent and its target for current account deposit balance above six trillion yen.
Data from the Ministry of Finance showed Japanese investors bought a net 1.466 trillion yen of foreign stocks and bonds at the first week of October or fiscal half year, on top of 934.7 billion during the last week in September.
Analysts estimated four-week moving averaged capital outflow has reached its highest since April, when the yen was languishing at near 2-1/2 year lows of 126.82.
But analysts said such purchases are likely to be fully hedged, given narrowing interest rate differentials between Japan and other countries, thus limiting the impact on currency levels.