By Ankur Banerjee

SINGAPORE (Reuters) – The dollar softened on Friday, with the euro and the yen on the rise as investors remained on tenterhooks ahead of next week's central bank bonanza where the focus is on the Federal Reserve and the size of its expected interest rate cut.

While the Fed is all but certain to cut rates next week, uncertainty around whether it will go with a 25 basis point cut or 50 basis points has kept investors on the edge and weighed on the dollar.

Analysts pointed to media reports from the Financial Times and the Wall Street Journal suggesting the Fed's decision would be a close call as one of the reasons for traders adding to wagers of a big rate cut next week.

Higher U.S. jobless claims data released on Thursday and the Wall Street Journal article on the Fed's rate cut dilemma revived bets on a jumbo cut at the September meeting, according to Christopher Wong, currency strategist at OCBC.

Traders are pricing in a 43% chance of the Fed cutting rates by 50 bps, up from 27% a day earlier, with a 57% probability of a 25 bps cut, CME FedWatch tool showed. Markets are pricing in 113 bps of easing from three remaining meetings this year.

The European Central Bank on Thursday lowered rates but ECB president Christine Lagarde dampened expectations for another cut next month, sending the euro higher, with the single currency holding onto those gains in early trading on Friday.

Besides the Fed, the Bank of England and Bank of Japan hold policy meetings next week.

The euro was slightly higher at $1.1083, after rising 0.57% on Thursday, leaving the dollar index, which measures the U.S. currency against six rivals including the euro, at 101.11.

A slew of mixed U.S. economic reports this week have muddled rate expectations, with a report on Thursday suggesting that layoffs remained low even as the labour market was slowing, while other data showed producer prices rising slightly more than expected in August amid a rebound in the cost of services.

The data will likely not make the Fed pause on cutting rates, "but it should serve as a reminder of the importance of balancing both sides of its mandate (employment and inflation)," said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

"Risks remain that inflation may not return to target as easily as everyone, including the Fed, seems to expect."

The yen was 0.3% higher at 141.38 per dollar in early trading, hovering close to the eight and half month high of 140.71 it touched on Wednesday ahead of the BOJ meeting.

BOJ board member Naoki Tamura said on Thursday the central bank must raise rates to at least 1% as soon as the second half of the next fiscal year but added that it would likely raise rates slowly and in several stages.

Sterling was 0.1% higher at $1.31415 ahead of the BoE meeting next week, where futures markets imply around an 80% chance that interest rates remain on hold, after a 25 basis point rate cut in August.

(Reporting by Ankur Banerjee in Singapore; Editing by Sonali Paul)