TOKYO, Dec 16 (Reuters) - The safe-haven dollar slipped on Friday, giving back some of the previous session's strong gains, as traders continued to digest the implications of continued monetary tightening at the world's biggest central banks.
The dollar index, which gauges the currency against six major peers, edged 0.12% lower to 104.38 in Asia.
That followed a 0.85% surge overnight, its biggest since late September, after European Central Bank President Christine Lagarde said there was more to do in the battle against inflation, stoking worries that tighter policy will trigger a recession.
A day earlier, Federal Reserve Chair Jerome Powell said policymakers expected U.S. rates to rise higher and stay elevated for longer.
"It has been a big night in markets, with the modestly 'risk-off' reaction to the Fed on Wednesday from what was seen as a slightly more hawkish than expected set of outcomes greatly exacerbated by the messaging out of the ECB's meeting," Ray Attrill, head of foreign-exchange strategy at National Australia Bank, wrote in a note.
The dollar-yen cross was among the most volatile on Friday, last down 0.33% at 137.30 but at one point dipping as much as 0.58%, following a 1.68% rally on Thursday, which saw it touch the highest level this month at 138.18 yen.
The Bank of Japan decides policy on Tuesday, and while no change is expected at that meeting, some market participants have begun betting on some tweaks to stimulus as Governor Haruhiko Kuroda prepares to depart in April.
"I am with the market consensus and don't expect any policy change at the BOJ's December meeting, but I want to carefully watch for any comments from Governor Kuroda about the next leadership," said Takahiro Sekido, chief Japan strategist at MUFG.
"Market participants may take that as a signal for policy normalisation, and that may support a strong yen," added Sekido, who says the dollar may weaken to 125 yen over 2023.
The euro added 0.14% to $1.06455, rebounding slightly from Thursday's 0.49% retreat.
Sterling gained 0.3% to $1.22175, following a 1.99% tumble the previous day, its biggest since Nov. 3.
The Bank of England also indicated on Thursday that more rate hikes are likely, though investors were less convinced, betting that the central bank might be getting close to the end of its tightening cycle.
For the week, the dollar index was on course for a 0.55% decline, keeping the broad downtrend in place since a peak in early October.
The risk-sensitive antipodean currencies bounced on Friday following big drops the previous day.
The Australian dollar was 0.24% higher at $0.6716, recovering after a 2.38% slide overnight - its biggest since March 2020 - that saw it touch $0.6677 for the first time since Dec. 7.
The New Zealand dollar rebounded 0.38% to $0.6365 following a 1.84% tumble on Thursday, when it dipped to $0.6321, also a first since Dec. 7.
(Reporting by Kevin Buckland; Editing by Sam Holmes)
