By Natsuko Waki
LONDON, March 14 - The dollar retreated against major currencies on Thursday on doubts surrounding the strength of the U.S. recovery and strong dollar policy, giving way to the euro which was underpinned by encouraging French data. The yen garnered support from gains in Tokyo stocks and a massive surge in Japan's current account surplus but warnings from Japanese authorities against a speedy yen rise kept the currency's advance in check. "The U.S. recovery story has played out so far but it is very fragile psychology and that's the risk for the dollar over the next couple of months," said Stacey Seltzer, currency strategist at Brown Brothers Harriman. "In order for the dollar to merely sustain its gains, every single data has to line up in its favour and to push up the dollar requires even greater surprise on the upside." By 1130 GMT the euro gained half a cent versus the dollar from late New York trade to the week's high of $0.8822 , just shy of a recent one and half month peak of $0.8839. The dollar also lost ground to the Swiss franc CHF= . The dollar slipped half a yen, standing at 128.71 yen JPY= , but still more than two yen away from last week's low around 126.40. The single currency see-sawed against the yen to stand unchanged on the day at 113.44 EURJPY= . TURNAROUND Analysts said the euro had made gains on the dollar somewhat by default, as the greenback was soft particularly in the wake of Wednesday's comments by Federal Reserve chairman Alan Greenspan. "There are several factors weighing on the dollar, among them the weak retail sales data and the feeling that Alan Greenspan was backtracking from his recent optimism on the U.S. economy," said Nick Parsons, global head of foreign exchange research at Commerzbank. "Greenspan's mention of the U.S. current account deficit has focused market attention on the problems associated with a strong dollar policy, particularly given the recent imposition of tariffs on U.S. steel imports." The euro had already drawn some support in Asia from falls of more than one percent on major U.S. stock indices. Data showing that French industry had returned to the growth path in January with output expanding faster than expected also underpinned the single currency. The European Central Bank's monthly report reaffirmed its confidence that the euro zone economy has bottomed out and that growth should return to full speed by the year end. The market was focused on Wall Street's start later in the session and waiting for weekly U.S. jobless claims at 1330 GMT as well as key U.S. industrial output data on Friday. Economists polled by expected jobless claims to come in at 374,000 in the week ended March 9, little changed from 376,000 a week earlier. NOT THERE YET A combination of a more than one percent rise in the benchmark Nikkei .N225 and news of a massive surge in Japan's current account surplus lifted sentiment for the yen. The surplus in the current account, the broadest measure of trade in goods and services, logged its second-biggest rise since records began in 1985, growing 224 percent from a year earlier to 709 billion yen ($5.48 billion). The trade surplus rose 424 percent, the biggest rise on record, to 336.8 billion yen. The surge reflected a recovery in the global economy which helped curb a slowdown in exports, as well as strong returns on Japanese investors' offshore investments. The mood further brightened after Japan's government upgraded its economic assessment for the first time since June 2000 and said the worst could be over for some, but not all, areas of the economy. But investors were cautious in pushing up the yen too far given data showing the number of Japanese corporate bankruptcies continued to rise in February from January as well as warnings from Japanese officials on a yen rise. Senior Finance Ministry official Zembei Mizoguchi repeated currency rates should reflect economic fundamentals and warning against volatile movements. "Gains in Nikkei was definitely positive for the yen and current account surplus was a very good sign. But given the fact that this recession in Japan was imported, we still have uncertainty there," Seltzer said.