LONDON - The dollar was pinned near a five-month low against a basket of major currencies on Friday ahead of key U.S. labour market data, while the yuan was set for its biggest weekly gain since China abandoned its dollar peg and revalued its currency in 2005.

The dollar index, which measures the currency against six major peers including the yen and euro, fell 0.2% to 104.47, having earlier touched its lowest level since June 29 at 104.36.

The index slipped over 5% last month on expectations that the Federal Reserve would start to slow its pace of rate hikes from the December meeting.

Data released on Thursday supported that view, with the core personal consumption expenditures (PCE) price index coming in below expectations. The Fed tracks the PCE price indexes for its 2% inflation target.

Fed chair Jerome Powell said on Wednesday that it was time to slow rate hikes, noting that "slowing down at this point is a good way to balance the risks."

"Over the past few days there was sufficient cause for pricing out dollar strength because not just Powell's overall dovish speech, but also yesterday's US data hit the same deflation spot," Commerzbank analysts said in a note.

Investors are now turning their attention to nonfarm payrolls data on Friday for clues on how rate hikes have affected the labour market.

"Markets are really buying into the pivot story from the Fed," said ING FX strategist Francesco Pesole, who noted sentiment is bearish on the dollar.

"Considering what's come from the inflation side, we'll need to see strong payrolls numbers for the dollar to rebound," Pesole added.

The prospect of the Fed slowing its pace of monetary tightening has rejuvenated investor sentiment and sent the dollar tumbling after four straight 75-basis-point (bps) hikes that fuelled much of the greenback's ascent this year.

Futures traders are pricing for the Fed's benchmark rate to peak at around 4.8% in May, compared to a top of over 5% before Powell's comments on Wednesday, according to data from Refinitiv.

Meanwhile, China's yuan rose 0.5% against the dollar to 7.0235.

The yuan gained 1.9% on the week and was set for its biggest weekly gain since China abandoned its peg to the U.S. dollar and revalued the currency in 2005, according to Refinitiv data, buoyed by expectations of an exit from China's zero-COVID policy and a slower pace of interest rate hikes from the Fed.

The dollar was 0.9% lower at 134.09 yen, having earlier slipped to its lowest level since Aug. 16 at 133.62.

The euro was little changed at $1.0532, after gaining 1.1% on Thursday.

European Central Bank President Christine Lagarde warned on Friday that some European governments' fiscal policies could lead to excess demand, and that fiscal and monetary policies need to work in synch for sustainable, balanced economic growth.

Sterling was last trading at $1.2260, down 0.1% on the day. The pound advanced 1.7% on Thursday, touching a 5-month high of $1.2311.

(Reporting by Samuel Indyk in London, Ankur Banerjee in Singapore; Editing by Raju Gopalakrishnan, Kim Coghill and Simon Cameron-Moore, William Maclean)