FOREX-Dollar drifts lower, undermined by soft U.S. data

* Forex market reaction muted to Yemen escalation, oil price surge

* Dollar index slips, euro edges toward $ 1.10

* U.S. data, Fed Evans comment undermine USD

By Lisa Twaronite and Ian Chua

TOKYO/SYDNEY, March 26 (Reuters) – The U.S. dollar ground lower in small ranges on Thursday, edging towards a four-week low against the yen in the wake of disappointing U.S. data that suggested the greenback’s recent rally is on ice for now.

News that Saudi Arabia and its Gulf Arab allies had launched air strikes in Yemen also quelled risk sentiment and led to a surge in oil prices, though the forex market impact was muted. The strikes are aimed at Houthi fighters who have tightened their grip on the southern city of Aden.

Against the yen, the dollar came within a whisker of a one-month trough of 119.22 yen set on Tuesday. It reached 119.26 on the EBS trading platform before staging a small recovery to 119.29, still down about 0.2 percent on the day, with Tokyo market participants citing dip-buying interest as it approaches the 119-level.

Data overnight showed spending on U.S. durable goods fell for a sixth straight month in February, fresh evidence that economic growth slowed sharply early in the year, in part due to bad weather.

The figures came on the heels of last week’s dovish steer from the Federal Reserve, which is now seen as likely to hike interest rates later rather than sooner, and kept the dollar index under pressure.

The index, which tracks the U.S. unit against a basket of six major rivals, dipped about 0.2 percent to 96.809, moving back in the direction of a three-week trough of 96.387 set on Tuesday. As recently as March 13, it scaled a 12-year peak of 100.390.

Also making dollar bulls uncomfortable, Chicago Fed President Charles Evans said he was concerned the strong dollar’s “clear disinflationary pressure” could get embedded in expectations.

Evans said that could make it even harder for the Fed to reach its 2 percent inflation target, adding there was “no compelling reason” to hurry and raise interest rates. He urged a delay in rate hikes until the first half of next year.

Thursday’s surge in oil prices, if sustained, might have a negative effect on global growth, but it would have an upside in helping to alleviate some of the downward pressure on prices. The recent oil price collapse has kept central banks, including the Fed and the Bank of Japan, from making much progress in achieving their inflation targets.

“Energy prices are up significantly, and that could be good news for the Fed. We need to see how far they can recover, and if the rises can be sustained. So the main focus is on what oil prices do from now,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo.

With the dollar on the back foot, the euro found itself flirting with $ 1.1000 again. It was last at $ 1.0976, up about 0.1 percent on the day, and well off a 12-year trough of $ 1.0457 plumbed two weeks ago.

“Our technical analysts think the current correction could extend higher (they are targeting 1.1180) but the longer-term downtrend is still intact,” Elsa Lignos, senior currency strategist at RBC, wrote in a note to clients.

The euro was modestly lower against its Japanese counterpart at 130.90 yen, but was well clear of a 21-month trough of 126.86 touched on March 13.

Commodity currencies failed to capitalise on the softer greenback with the Australian, New Zealand and Canadian currencies all losing a bit of ground.

The Aussie dollar skidded 0.3 percent to $ 0.7815, pulling further away from a two-month high of $ 0.7939. It was not helped by volatile commodity prices and worries about slowing growth in China, Australia’s biggest trading partner.

(Editing by Chris Reese and Eric Meijer)