The yen rose against the dollar on Friday but still looked on course for its biggest weekly decline since June after the latest batch of U.S. economic data eased fears of a recession and supported bets of gradual Federal Reserve interest rate cuts.

The dollar was 0.8% softer against the Japanese yen at 148.070, having touched a two-week high of 149.40 in the prior session.

Risk-sensitive currencies such as sterling were firm as the improved economic outlook spurred a rally in equities.

Data on Thursday showed the number of Americans filing new applications for unemployment benefits dropped to a one month-low last week while U.S. retail sales increased by the most in 1-1/2 years in July, dashing expectations that the Fed could cut interest rates by 50 basis points (bps) next month.

"We are in the camp that thinks growth slowdown is there, inflation is slowing and the Fed will start cutting rates but it's not going to be a panic situation, which was turning into a narrative a week or two ago," said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.

"We remain of the view that we'll see 2-3 cuts, very likely two rather than three unless the increase in the unemployment rate that we saw in the last payrolls report sustains."

Traders are convinced the Fed will cut rates on Sept. 18, but had debated the size of the reduction after surprisingly soft U.S. payrolls data pushed the odds of a larger 50 basis-point cut to 71% in early August.

Odds for such a move have fallen back to 32%, according to the CME Group's FedWatch Tool.

The dollar index, which measures the greenback against six other major currencies, had eased 0.3% to 102.75 by 1135 GMT.

YEN STILL WEAK, POUND A BRIGHT SPOT

With losses of about 1%, the yen was on track for its biggest weekly drop in almost two months.

The currency surged to as strong as 141.675 yen per dollar on Aug. 5 as the Bank of Japan's surprise rate hike, combined with the flare-up in U.S. recession worries, sparked an aggressive unwinding of yen-financed carry trades.

Some calm was restored after influential BOJ deputy governor Shinichi Uchida said the central bank would not hike rates when markets are volatile, and there are signs traders have been rebuilding short positions.

"There's a lot of room for (carry trades) to be wound up again. Uchida's (dovish) guidance was quite strong. Foreign investors are going to take this as a dip-buying opportunity in dollar-yen," Shoki Omori, chief Japan desk strategist at Mizuho Securities, said.

Official data shows plenty of flows are happening, and Japanese investors ploughed the most money into long-term overseas bonds in 12 weeks in the week to Aug. 10, while foreigners were net buyers of short-term Japanese debt after eight straight weeks of selling.

Overseas investors also snapped up about $3.5 billion in Japanese shares, reversing three consecutive weeks of net selling.

Sterling rose 0.4% to $1.2904 - its highest since July 25 - after data showed British retail sales edged up in July, boosted in part by extra spending during the men's Euros soccer championship after an unusually cool and wet June had kept shoppers away.

The pound was on track for a 1.2% weekly rise, its best performance in more than a month.

The euro added 0.2% to $1.0993. The common currency touched its highest level since Jan. 3 earlier this week, helped by drop in the dollar after soft data.

(Reporting by Kevin Buckland in Tokyo and Sruthi Shankar in Bengaluru Editing by Andrew Heavens, Kirsten Donovan)