By Daniel Leussink
TOKYO, May 24 (Reuters) - The dollar was on track on Friday to post a small weekly loss after coming off two-year highs on lower U.S. yields as investors feared the Sino-U.S. trade dispute will hurt the U.S. economy more than previously thought.
Another factor keeping the greenback down was rising expectations the Federal Reserve will cut U.S. interest rates later this year to boost the world's biggest economy.
Against a basket of key rival currencies .DXY, the dollar was largely unchanged at 97.878, having fallen from a two-year high of 98.371 overnight. That put the dollar on track for a 0.12% loss this week.
Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said that due to U.S.-China trade tensions, "markets are pricing in the potential negative impact" on the U.S. economy and the U.S. equities.
President Donald Trump on Thursday said U.S. complaints against Huawei Technologies Co Ltd HWL.UL might be resolved within the framework of a U.S.-China trade deal, while at the same time he called the Chinese telecommunications giant "very dangerous."
The 10-year U.S. Treasury note yield US10YT=RR was last up slightly at 2.327%.
On Thursday, it fell to its lowest since October 2017 after an early read on U.S. manufacturing activity for May showed the weakest pace of growth in almost a decade, suggesting a sharp slowdown in economic growth was under way.
There was only a 38.4% expectation on Thursday that U.S. interest rates will be at current levels in October, compared to 58.3% a month ago, according to the CME Group's FedWatch tool.
"Markets are pricing in a rate cut as damage from the trade tension is thought to be larger than imagined, though the Fed hasn't talked about it at all," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
"The Trump administration is expected to put a fair amount of pressure on the Fed from now on. Investors are thinking about a rate-cut scenario without the Fed giving in to that."
Against the yen, the dollar edged down to 109.59 yen JPY=, extending losses overnight, when it gave up two-thirds of a percent, its steepest drop in a single session in two months.
"Global risk aversion stemming from the intensifying U.S.-China trade tension is causing the stronger yen," said Mizuho's Yamamoto.
The greenback is still 0.5% above a three-month trough of 109.02 yen touched on May 13.
The Australian dollar was off 0.2% at $0.6884 AUD=D4 after the chief economist of Westpac Banking Corp said he expects three central bank rate cuts this year, one more than the market consensus for two easings.
The Aussie still remained on track to finish the week with a small gain, its first advance in six weeks.
The euro was flat at $1.1181 EUR=, having bounced from a two-year low of $1.11055 during the previous session.
The single currency came under pressure after a private survey showed activity in Germany's services and manufacturing sectors fell in May, aggravating fears about the effect of unresolved trade disputes on Europe's largest economy.
Compounding these worries, European parliamentary elections began on Thursday with eurosceptic parties expected to do well, raising concerns about the single currency's stability.
(Reporting by Daniel Leussink; Editing by Darren Schuettler and Richard Borsuk)
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