NEW YORK  - The dollar weakened on Friday after a reading of U.S. inflation indicated price pressures continue to cool, while the yen strengthened against the greenback after former defense minister Shigeru Ishiba was set to become Japan's next prime minister.

The U.S. personal consumption expenditures (PCE) price index rose 0.1% in August, matching expectations of economists polled by Reuters, after an unrevised 0.2% gain in July.

In the 12 months through August, the PCE price index increased 2.2% after rising 2.5% in July.

In addition, consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2% last month after an unrevised 0.5% gain in July.

The data was slightly below the 0.3% estimate but indicated the economy still maintained some momentum in the third quarter.

The Federal Reserve has recently signaled a shift in focus away from inflation and towards keeping the labor market healthy, but delivered a larger-than-usual interest rate cut of 50 basis points (bps) last week. "(Fed Chair) Powell can breathe a little sigh of relief," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"After pushing for a 50 bps cut instead of a more conventional 25 bps cut the personal income and spending data so far vindicates that decision."

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was down 0.39% at 100.21, after falling to 100.15, its lowest since July 20, 2023, with the euro up 0.16% at $1.1195.

The dollar is down nearly 0.6% for the week, on pace for its fourth straight weekly decline.

The euro is up more than 0.3% and set for a second straight weekly gain. Markets are fully pricing in a cut of at least 25 basis points at the Fed's November meeting, with expectations for another upsized 50 basis point cut edging up to 54.1% after the data, according to CME's FedWatch Tool, from 49.9% before the release.

The yen strengthened after Japan's Ishiba won the leadership contest of the country's ruling Liberal Democratic Party in a narrow victory. Ishiba is a critic of past monetary stimulus and told Reuters the central bank was "on the right policy track" with rate hikes thus far.

Markets had been largely expecting a win for hardline nationalist Sanae Takaichi, a vocal opponent of further interest rate hikes, pricing in loose monetary and fiscal policies and a weaker yen over the past week.

The Japanese yen was 1.43% stronger at 142.75 per dollar after strengthening as far as 142.48, on track for its biggest daily percentage gain since Aug. 5. For the week, the dollar is down about 0.7% against the yen.

The euro fell 1.24% to 159.83 against the Japanese currency.

The euro was also down 0.13% at $1.1163 after data showed inflation in France and Spain rose less than expected, prompting traders to ramp up their bets on an October rate cut from the European Central Bank.

China, meanwhile, launched another round of stimulus measures on Friday, as the country's central bank lowered interest rates and injected liquidity into the banking system as it attempts to bring economic growth back towards this year's target of about 5%.

The dollar strengthened 0.16% to 6.982 versus the offshore Chinese yuan. Sterling strengthened 0.04% to $1.3421 and is up more than 0.7% on the week, poised for a second straight weekly advance.

(Reporting by Chuck Mikolajczak; Editing by Kirsten Donovan)