By Samuel Indyk
LONDON (Reuters) - The euro fell on Thursday as traders trimmed bets on a rate hike from the European Central Bank in September after comments from influential German policymaker Isabel Schnabel and a moderation in underlying price growth in August.
The single currency was last down 0.5% at $1.0871, retracing all of the previous day's gain after German and Spanish inflation data had traders betting that the ECB would hike again next month.
But, while euro area-wide inflation unexpectedly held at 5.3% this month, underlying price growth fell, complicating matters for the ECB, who now appear more likely to keep interest rates unchanged next month than raise them.
ECB rate-setter Schnabel - considered one of the most hawkish members on the ECB - said euro zone growth was weaker than predicted but that does not necessarily void the need for more rate hikes.
"We've heard the most influential hawk on the Governing Council take on a much more cautious tone," said Michael Brown, analyst at Trader X.
"I think the fact she is flagging downside risks to growth is putting some downside pressure on the euro."
Traders priced around a 70% chance that the ECB will stick with its current interest rate in September, having raised bets that they would hike the day before after the German and Spanish figures.
Sterling, which followed the euro's gains on Wednesday, likewise was softer at $1.2681. Both sterling and the euro are set for monthly drops of over 1% against the dollar in August.
Dollar gains have been fuelled by expectations that interest rates will linger longer at elevated levels, but have eased this week on glimpses of cooling U.S. spending and hiring.
The dollar index, while still up more than 1.6% for August, has fallen 0.6% for the week so far. On Thursday it was up 0.4%.
U.S. personal consumption data and PCE price indexes - which the Federal Reserve tracks for its inflation target - are due later on Thursday.
On Wednesday, the Commerce Department revised down U.S. second-quarter growth to 2.1% from an estimate of 2.4%. U.S. payrolls data is due on Friday and second-tier figures this week such as job openings and private payrolls have indicated the labour market could be losing steam.
"The move in the dollar has been driven on one side by the soft second-tier U.S. jobs data," said Chris Turner, global head of markets and regional head of research for UK & CEE.
"Trying to fight the dollar is still very difficult at the moment but perhaps there'll be more evidence of a slowdown in the fourth quarter."
The dollar's pullback this week, along with wariness of Japanese government intervention, has steadied the yen. It is 2.5% lower on the dollar this month and down 10% for the year, but has found some stability around 146 yen per dollar. It was last at 145.895.
The euro, meanwhile, was last at 158.65 yen, close to a 15-year high of 159.76 reached the day before.
Japanese data was mixed on Thursday, with 6.8% year-on-year growth in retail sales handily beating a forecast of 5.4%, but factory output slumping. A rare strike at a department store in Tokyo foreshadows, perhaps, upward pressure on wages, though division among policymakers suggests a response is a ways off.
A marginally better-than-expected Chinese manufacturing survey kept the yuan, Australian dollar and New Zealand dollar steady, though all three are set for sizeable monthly drops on worries about China's economic slowdown.
The Aussie traded down 0.1% at $0.6463 and the kiwi, down 4% for August, held at $0.5941. The yuan traded at 7.2878 per dollar for a 2% monthly loss.