(Updates to early European afternoon)

* Yen hands back half its intervention boost

* Weekly drop is largest since previous intervention faded

* Dollar balances oil gains with retreating rate hike bets

* Euro at highest in a year on Swiss franc

SINGAPORE, Aug 14 (Reuters) - The yen headed for its biggest

weekly loss in about a month on Friday as the impact of U.S. and

Japanese intervention faded, leaving traders to wager that

either rate hikes or another round of official buying would be

needed to stem the decline.

The currency has surrendered roughly half the gains sparked by

intervention in late July and early August, falling about 0.9%

this week to 159.15 per dollar.

It was trading at 40-year lows near 164 per dollar before

July's intervention and traders see the 160 level as a potential

trigger for fresh official action.

Its retreat mirrors a similar selloff in May, when it also

fell back after a round of official buying.

"It will be interesting to see whether the yen bears test the

limits of intervention in the coming days, or whether

policymakers in Tokyo and Washington will look to jump back into

the market on a pre-emptive basis," said Mark Dowding, CIO for

fixed income at RBC BlueBay Asset Management, in a weekly note.

"Within Japan, it seems that it is becoming increasingly

apparent that the (Bank of Japan) will need to be permitted to

hike rates at its September meeting, accelerating the path of

monetary policy normalisation, in order to stymie further

pressure ahead.

The Japanese currency strengthened in Friday trade after Reuters

reported the Bank of Japan is set to raise rates as soon as

September and is considering more aggressive hikes to follow,

citing three people familiar with policymakers' thinking.

Since exiting a massive, decade-long stimulus in 2024, the

BOJ has raised interest rates at a pace of roughly twice a

year.

The broader currency market has been fairly steady this week,

with support for the dollar from inflows to U.S. tech stocks as

well as higher oil prices and Middle East tension offset by

benign U.S. jobs and inflation reports that reduced expectations

for U.S. interest rate hikes.

Thursday figures showing unchanged U.S. producer prices in July

further supported dialing back bets on a September hike, now

seen as a roughly 35% chance, and sent short-dated Treasury

yields lower.

The euro nudged up 0.3% on Friday to $1.1563 though it is

flat on the week. Sterling similarly gained 0.3% to $1.3537,

also slightly stronger on the week, helped at the margin by

Thursday's stronger-than-expected GDP data.

"The ongoing decline in short-term US rates has been

providing a headwind for the US dollar performance this month

but has not yet been sufficient to trigger another leg lower

after the sell-off at the end of last month," said Lee Hardman,

senior currency analyst at MUFG.

"The price action suggests that the U.S. dollar could be

deriving support from inflows into the U.S. equity market in

particular AI-related stocks."

Elsewhere the Swiss franc continued to lose ground on the

euro. The common currency briefly nudged to about 0.94 francs,

its highest since August 2025, and was last up 0.16% on the day.

The franc could be weakening, as yen intervention fears push

traders to fund currency trades out of the low-yielding franc

instead of the yen.

A surprisingly low inflation expectations reading knocked

the New Zealand dollar on Thursday, but it bounced back

as the swap market stuck with an 85% chance of a rate hike in

September.

The kiwi was up 0.6% at $0.5887.