* Euro nudges higher on upbeat euro zone, German data
* Yen treads water ahead of closely-eyed BOJ decision
* Aussie struggles near 3-week lows vs dollar
By Shinichi Saoshiro
TOKYO, Oct 30 (Reuters) - The euro edged up against the dollar early on Friday following upbeat euro zone economic data, while the yen was treading water ahead of the Bank of Japan's monetary policy decision due later in the day.
The euro rose 0.1 percent to $1.0988 EUR= after gaining about 0.5 percent overnight on an unexpected improvement in euro zone economic sentiment and signs of faster-than-expected inflation in Germany.
The data helped the common currency bounce from a 2-1/2-month low of $1.0896 struck midweek when the U.S. Federal Reserve helped keep alive prospects of a interest rate hike in December.
The dollar dipped 0.1 percent to 120.95 yen JPY= after spending the previous day in a narrow range to close almost flat.
The BOJ decision due Friday has drawn more attention than usual due to heightened speculation that the central bank could ease monetary policy following a run of downbeat Japanese indicators.
"While seeing USD/JPY downside risks overall, all we can be confident about is that USD/JPY will move sharply on the statement," wrote Sean Callow, a senior strategist at Westpac in Sydney.
BOJ governor Haruhiko Kuroda has not dropped any specific hints on further easing, but the market remains on guard after the central bank loosened policy a year ago without any prior warning.
The Australian dollar remained on the defensive after taking hits earlier in the week on the Fed's hawkish-sounding statements.
The Aussie fetched $0.7086 AUD=D4 after brushing a 3-week low of $0.7067.
The dollar index .DXY was nearly flat at 97.151, having pulled back from a 2-1/2-month high of 97.818 struck on Wednesday as the euro rebounded. (Editing by Richard Pullin)