* Dollar bounces back from 7-week low vs yen
* Investors await Yellen speech for possible policy clues
* Sterling falls after biggest one-day gain since 1998
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Jan 18 (Reuters) - The dollar rebounded on Wednesday after falling for five days in a row against its currency basket, as investors awaited a speech by the head of the Federal Reserve later in the day and looked to U.S. inflation data for clues on the path of interest rates.
After a volatile Tuesday on which sterling rose more than 3 percent for its best showing against the dollar since at least 1998, currency markets were calmer on Wednesday, with most of the previous day’s moves reversing some of their course.
Sterling retreated 1 percent. The dollar, which hit a seven-week low of 112.57 yen in early trade in Asia, climbed 0.8 percent to 113.19 yen after seven straight days of falls.
The dollar index, which measures it against a basket of six major peers, stood at 100.68, up 0.4 percent, after falling to 100.26 on Tuesday, its lowest since Dec. 8.
The dollar had surged at the end of 2016 on expectations that fiscal stimulus proposed by U.S. President-elect Donald Trump would boost growth and inflation and lead to a faster pace of U.S. interest rate rises, but it has lost more than 2 percent over the past two weeks.
“We went a bit far on dollar weakness yesterday, so it’s natural to have a correction once in a while (but) the downward trend is intact,” said UBS currency strategist Daniel Trum, from Zurich.
“Markets are finally becoming aware of the potential negative effect of Trump’s policies on the U.S. dollar - at the beginning we had lots of positive sentiment... but now we see that the focus is shifting more towards potential trade disputes and potential difficulties in Trump implementing his policies.”
One of the reasons given for the greenback’s weakness this week was a comment from Trump in a weekend newspaper interview, in which he said U.S. companies could not compete with China because the dollar was too strong against the yuan, which was “killing” them.
From London, RBC Capital Markets currency strategist Adam Cole said the comments might have helped to weaken the dollar at the margins, but they had not been a major factor as Trump had shown a lack of understanding of currency markets.
“The fact that he talks about China manipulating the currency is just not credible... so that reduces the credibility of what he says about the currency, because it’s clearly at odds with anything that’s actually happening,” Cole said.
He added the dollar’s recent weakness had been primarily driven by positioning, which had built up heavily in favour of further dollar gains and was therefore vulnerable to exaggerated falls on negative news.
Fed Chair Janet Yellen’s speech later on Wednesday, to the Commonwealth Club in San Francisco, could offer clues about the direction of monetary policy.
San Francisco Federal Reserve Bank President John Williams said on Tuesday he saw a “good case” for three rate hikes this year even without fiscal stimulus, but if the economy accelerated, the Fed would need to raise rates faster.
Investors also awaited the U.S. consumer price index, expected to show inflation at 0.3 percent last month, compared with 0.2 percent in November.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Yuzuha Oka; editing by John Stonestreet and Pritha Sarkar)