By Ankur Banerjee

SINGAPORE (Reuters) - The dollar eased on Friday and was on course for a weekly decline against a basket of currencies as traders wagered that the U.S. Federal Reserve was most likely done with rate increases, lifting risk sentiment.

The dollar index, which measures the U.S. currency against six rivals, was down 0.122% at 106.07, not far from the one-week low of 105.80 it hit on Thursday.

The index is on course to drop 0.4% for the week, just its third week of losses in the last 16 weeks.

Markets are now pricing in less than a 20% chance of a rate increase in December compared with 39% earlier, CME FedWatch tool showed, in the wake of the U.S. central bank's holding interest rates steady on Wednesday. The Fed, however, left the door open to a further increase in borrowing costs in a nod to the economy's resilience.

"Fed is now walking a tightrope between financial conditions and rate hikes," said Moh Siong Sim, currency strategist at Bank of Singapore, noting that the Fed said rising bond yields are doing some work for it and it can afford to wait and see.

But since the Fed's policy decision, the yield on 10-year Treasury bonds have dropped over 20 basis points. A holiday In Japan meant cash Treasuries were untraded in Asia on Friday.

"There's still this underlying tension here that could be a worry but for now market has become more relaxed," said Sim.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits increased moderately last week as the labour market continued to show few signs of a significant slowdown.

Investor focus will switch to October non-farm payrolls data later in the day, with the U.S. expected to have added 180,000 jobs in October, according to a Reuters poll of economists. A weaker result will likely put further pressure on the dollar.

"Even if October nonfarm payrolls were to come ahead of expectations, this wouldn’t necessary support calls for the Fed to hike in December," said Julien Lafargue, chief market strategist at Barclays Private Bank.

"Indeed, the central bank appears to be more focused on inflation rather than jobs and economic growth."

Analysts said upcoming economic data will likely determine whether the weakness in dollar will be sustained.

Christopher Wong, currency strategist at OCBC, said a more entrenched disinflationary trend, and a material easing of U.S. labour market tightness and activity data are needed for the dollar to trade softer.

But for now, Wong said, the dollar still retains a "significant yield advantage and is a safe haven proxy to some extent."

In other currencies, sterling was at $1.2198, down 0.02% on the day, having risen 0.4% on Thursday, and was on course for a 0.5% weekly gain. The euro was up 0.05% at $1.0625, also set to clock a weekly gain of 0.5%.

The Bank of England joined other major central banks in holding rates steady on Thursday and stressed that it did not expect to start cutting them any time soon.

The European Central Bank last week snapped a streak of 10 straight rate increases, with the discussion shifting to how long rates would stay high.

ECB board member Isabel Schnabel said on Thursday the "last mile" of disinflation may be the toughest, and the central bank cannot yet close the door on further rate rises.

The yen strengthened 0.11% to 150.28 per dollar, keeping traders nervous and looking for signs of intervention from Japanese authorities.

The yen has had a whirlwind week, touching a one-year low against the dollar and 15-year low against the euro on Tuesday after the Bank of Japan tweaked its yield curve control policy.

Kazuo Ueda, the central bank's governor, will continue to dismantle its ultra-loose monetary policy and look to exit the decade-long accommodative regime next year, Reuters reported on Thursday, six sources familiar with the central bank's thinking.

The Australian dollar was little changed at $0.6434, just shy of the over one-month high of $0.6456 it touched on Thursday. The New Zealand dollar was 0.12% higher at $0.5901.

Both the Aussie and the kiwi are up 1.6% for the week, their best weekly performance since mid-July.