By Peter Nurse

- The U.S. dollar stabilized in early European trade Thursday ahead of a widely awaited U.S. consumer inflation release, while the Japanese yen surged ahead of next week's Bank of Japan meeting.

At 03:00 ET (08:00 GMT), the , which tracks the greenback against a basket of six other currencies, edged higher to 102.918, not far off its seven-month low of 102.76 hit earlier in the session.

The greenback has been on the back foot since late last year as an easing in interest rate increases by the , and the expectation of more easing to come, ended a rally that pushed the currency to a 20-year peak in September.

Data showing inflation slipping back from 40-year highs has powered the expectation of the Fed reining in its aggressive rate hikes, and thus the focus is now squarely on the December release, due later in the session.

This is expected to show that inflation eased further from the prior month, with the headline annual rate seen coming in at 6.5% in December, a drop from 7.1%. The figure, which excludes volatile energy and food prices, is seen showing annual growth of 5.7%, down from 6.0% in November.

"This year's FX market proposition remains whether U.S. inflation can acquiesce enough to allow the Fed to cut later this year," said analysts at ING, in a note. "The markets price a 50/60bp hike into the spring, then a cut of a similar magnitude by year-end."

Elsewhere, fell 0.6% to 131.69 following a local report that the Bank of Japan could review its bond yield targeting policy at next week's policy meeting, potentially taking additional steps to correct distortions in the yield curve.

The yen suffered badly last year as the resolutely retained a soft monetary policy stance even as other senior central banks, and the Federal Reserve, in particular, started to aggressively tighten interest rates to combat soaring inflation.

However, the Japanese central bank surprised in December with a tweak to its bond yield control, and speculation has been growing that it will be forced to do something similar again as it faces severe inflationary pressures at home.

rose 0.1% to 1.0761, after rising to a seven-month peak of 1.0776 in the previous session, rose 0.1% to 1.2149, and edged higher to 0.6901.

fell 0.2% to 6.7590, with the yuan near a five-month high after data showed that grew slightly more than expected in December from the prior month, indicating that economic activity was beginning to perk up after the government relaxed most anti-COVID measures.