By Daniel Leussink
TOKYO (Reuters) - The dollar held steady on Friday, having come off two-year highs on lower U.S. yields in the previous session amid fears that a trade war with China will hurt the U.S. economy more than previously thought.
The greenback was not helped by rising expectations for an interest rate cut by the U.S. Federal Reserve later this year to help boost the world's biggest economy.
Against a basket of key rival currencies, the dollar was largely unchanged at 97.906, having fallen from a two-year high of 98.371 overnight. The index is still up 1.8% for the year.
"Global risk aversion stemming from the intensifying U.S.-China trade tension is causing the stronger yen," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
"Markets are pricing in the potential negative impact on the U.S. economy and the U.S. equity markets," he said, referring to U.S.-China trade tensions.
On Thursday, President Donald Trump said U.S. complaints against Huawei Technologies Co Ltd might be resolved within the framework of a U.S.-China trade deal, while at the same time calling the Chinese telecommunications giant "very dangerous."
The benchmark 10-year U.S. Treasury note yield was last up slightly at 2.3309%.
Overnight, it fell to its lowest since October 2017 after an early read on U.S. manufacturing activity for May posted its weakest pace of growth in almost a decade, suggesting a sharp slowdown in economic growth was underway.
There was only a 38.2% expectation on Thursday that U.S. interest rates will be at current levels in October of this year, compared to 58.3% a month ago, according to the CME Group's FedWatch tool.
Against the yen, the dollar edged up to 109.695 yen, having giving up two-thirds of a percent overnight to record its steepest drop in a single session in two months.
The greenback is still 0.6% above a three-month trough of 109.02 yen touched on May 13.
The Australian dollar held steady at $0.6904, putting it on track to finish the week with a 0.5% gain, its first positive weekly performance in six weeks.
Elsewhere in the foreign exchange market, the euro was flat at $1.1183, having bounced from a two-year low of $1.11055 during the previous session.
The single currency came under pressure after a private survey showed activity in Germany's services and manufacturing sectors fell in May, aggravating fears about the effect of unresolved trade disputes on Europe's largest economy.
Compounding these worries, European parliamentary elections began on Thursday with eurosceptic parties expected to do well, raising concerns about the single currency's stability.
(Reporting by Daniel Leussink; editing by Darren Schuettler)