*

Dollar index nearly flat for the week

*

Sterling falls as Britain's borrowing shoots past

forecasts

*

Yen appreciates as BOJ votes to hold but hawkishness grows

(Update to U.S. morning)

By Saqib Iqbal Ahmed

NEW YORK, Sept 19 (Reuters) -

The U.S. dollar rose on Friday, extending its rebound

against most major currencies, as traders reassessed the

near-term outlook after the Federal Reserve cut interest rates

this week but signalled that further easing would proceed only

gradually.

The U.S. Dollar Currency Index, which tracks the

greenback against six major peers, was up 0.3% at 97.588 on

Friday. The gauge, which fell 1% on Monday and Tuesday on

expectations the Federal Reserve might flag a rapid series of

rate cuts, was nearly flat for the week.

On Wednesday, the

Federal Reserve delivered an expected rate cut but signalled

little urgency to lower borrowing costs quickly in the coming

months. The Fed's rate forecast or the so-called "dot plot"

showed projections of two more rate reductions this year.

"It's really a week of two halves," Marc Chandler, chief

market strategist at Bannockburn Forex, said.

"The votes, the actual dots, were not as dovish as the

statement and the concerns about the labor market suggested,"

Chandler added.

With the dollar having come under selling pressure in

the days before the Fed decision, the U.S. currency may have

room to rebound further.

"What we're telling our clients is that this is just a

counter-trend move. If you have to sell dollars, you'll have a

better level shortly," Chandler said.

STERLING SLIDE

Sterling fell on Friday after Britain's borrowing surged

past official forecasts, further complicating the country's

fiscal outlook, while the yen firmed after the Bank of Japan's

decision to hold rates steady revealed divisions on the board.

The pound was one of the worst performers among G10

currencies, mirroring investors' concerns that British finance

minister Rachel Reeves may not be able to keep her budget under

control.

The currency was down 0.5% to $1.3492, heading

for its biggest two-day drop since late July.

"Despite a better reading from UK August retail sales data,

poor UK government borrowing data have highlighted the

difficulties Chancellor Reeves faces in delivering the UK budget

in November," Jane Foley, head FX strategist at Rabobank, said.

Data published early on Friday showed

British retail sales

rose by a stronger-than-expected 0.5% in August, helped by

sunny weather, but sales growth in July was revised slightly

down.

The borrowing figures - the highest for the first five

months of a financial year since 2020 - could pave the way for

further tax increases.

Even before Friday's data, Reeves had been expected to

announce new tax increases in her November 26 budget to stay on

track to meet her fiscal rules and avoid fresh upheaval in

financial markets.

BOJ DISSENT UNDERPINS YEN

In Asia, the BOJ board

dissent

came as a surprise, unsettling equity and bond investors

and putting their focus back on how soon the BOJ will next raise

interest rates.

"This was unexpected, and suggests that perhaps policy

rate hikes may be coming sooner than anticipated," David Chao,

global market strategist for Asia-Pacific at Invesco in

Singapore, said.

The central bank's next meeting on October 30 will now be a

live meeting, and "the best chance for a rate hike for the rest

of this year," he added.

In a volatile session after the BOJ decision, which saw

the board maintain interest rates at 0.5%, the yen surged

initially but later pulled back, leaving the dollar down about

0.1% against the Japanese currency at 147.85 yen.

After the decision, BOJ governor Kazuo Ueda told a press

conference that the central bank would continue to raise rates

if its economic and price forecasts prove correct.

In the meantime, Japan's ruling Liberal Democratic Party

(LDP) holds a leadership race on October 4 to replace outgoing

Prime Minister Shigeru Ishiba, with markets uncertain whether

the outcome could impact the BOJ's policy path.

The New Zealand dollar extended its slump from the prior

session, falling 0.4%, a day after a strikingly weak reading on

the economy pushed yields sharply lower as markets ramped up

wagers for bigger rate cuts ahead.

Cryptocurrency bitcoin was 1.4% lower at $115,944.