* U.S. consumer prices rise less than expected in July
* Morgan Stanley forecasts more euro gains
* Graphic: World FX rates in 2017 (Updates with U.S. market open; changes dateline; previous LONDON)
By Saqib Iqbal Ahmed
NEW YORK, Aug 11 (Reuters) - The U.S. dollar weakened against a basket of currencies on Friday, after data showed U.S. consumer prices rose less than expected in July, pointing to benign inflation that could make the Federal Reserve cautious about raising interest rates again this year.
The dollar index, which tracks the greenback against six major currencies, was down 0.13 percent to 93.28, after earlier falling to a one-week low of 92.992.
The U.S. consumer price index edged up 0.1 percent last month after being unchanged in June. Economists polled by Reuters had expected the CPI to rise 0.2 percent in July.
“If the data continues to come in on the softer side, the market might start to price the Fed staying on hold this year,” said Sireen Harajli, FX strategist at Mizuho in New York.
Federal funds futures suggested traders saw a 40 percent chance that the Fed would increase short-term rates at its Dec. 12-13 policy meeting, compared with 42 percent shortly before the release of the July consumer price data.
Harajli, who still expects the Fed to raise rates one more time this year, said Friday’s numbers were unlikely to sway the central bank from announcing the beginning of the reduction in size of its balance sheet later this year.
The dollar fell to a sixteen-week low against the Japanese yen, but pared losses after Russian Foreign Minster Sergei Lavrov said there was a Russian-Chinese plan to defuse tensions between the United States and North Korea.
“The last thing the markets want here is the tension between U.S. and North Korea. It’s a situation with no good resolution even though most people are skeptical that Russia and China have a plan to defuse the situation,” said Stan Shipley, strategist at Evercore ISI in New York.
The dollar was little changed against the Swiss Franc after erasing losses from earlier in the session.
The franc and the yen are often sought in times of geopolitical tension and have logged big gains against the dollar this week amid escalating tensions between North Korea and the United States.
“I think investors are likely to remain cautious heading into the weekend,” Harajli said.
The euro was up 0.15 percent to $1.1788 after Morgan Stanley raised its currency forecasts for the currency, predicting it would hit $1.25 early next year.
Sterling was little changed against the dollar and held near a three-week low as investors remained wary about the outlook for the British economy after a mixed bag of data this week.
Reporting by Saqib Iqbal Ahmed; additional reporting by Richard Leong