* Dollar recovers after Thursday’s falls; euro slips
* U.S. inflation points to gradual rate rises
* Emerging market currencies get a breather
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tommy Wilkes
LONDON, May 11 (Reuters) - The euro slipped on Friday as the dollar recovered following weaker than expected inflation data that appears to have stalled the greenback’s recent rally to 2018 highs.
The dollar is still headed for its fourth straight week of gains, although much more modestly this week. The U.S. currency’s recovery has been led by investors unwinding short positions in the belief that the U.S. economy looks relatively strong and that interest rates in the United States will rise while stagnating in other parts of the world.
U.S. consumer prices rose less than expected in April, which would support gradual, rather than more aggressive, rate increases by the Federal Reserve.
The dollar index is up 0.2 percent this week, less than the more than 1 percent gains it racked up in the previous two weeks.
“The dollar’s rally is likely to have ended for now. But of course U.S. dollar strength could hardly go on as quickly and smoothly as it had done for the past weeks,” said Commerzbank analysts, predicting that the inflation numbers would only cause a pause in the dollar’s recovery.
The dollar index against a basket of major currencies rose 0.1 percent to 92.744, down from Wednesday’s 4-1/2-month high of 93.42.
The euro fell 0.1 percent to $1.1905 but was off its 2018 lows of $1.1823 hit on Wednesday.
The single currency had started 2018 on a run as investors bet on a stronger euro zone economy and tighter monetary policy, but is now down year-to-date against the dollar.
The euro has so far weathered the impact from rises in Italian bond yields on signs the two anti-establishment parties could sweep into power as they made “significant steps” towards forming a government after weeks of political stalemate.
However, Italy’s next prime minister could be an independent figure who is not a member of either the anti-establishment 5-Star movement or the far-right League and a government could be sworn in next week if all goes well, a top 5-Star member said in a newspaper interview published on Friday.
Currency trading was generally quiet on Friday after a busy week, with most major pairs holding within small ranges.
“Given recent rises in oil prices, a weaker dollar earlier this year, and U.S. tax cuts, markets were clearly worried more about upside risks in (U.S.) inflation,” said Minori Uchida, chief currency strategist at MUFG Bank.
The dollar traded flat against the yen at 109.41 yen, off its three-month top of 110.05 yen touched on May 2.
The Australian dollar, which had been hit by the loss of its long-cherished status as the highest yielding currency in the developed world as U.S. rates have risen, bounced back to $0.7539 from Wednesday’s 11-month low of $0.7413
The dollar’s retreat should also take the heat off emerging market currencies that have been battered by worries about rising dollar costs and about capital outflows to the U.S.
Political uncertainty in specific emerging markets has also hurt some emerging market currencies.
The Turkish lira, however, fell another half a percent to 4.26 to the dollar, although that was off its record low of 4.3780 hit on Wednesday.
The Malaysian ringgit, which has been hurt by uncertainty following a surprise election result, dropped to 4.075 per dollar in the offshore forward market, off a near six-month low of 4.1350 touched on Thursday. (Additional reporting by Hideyuki Sano in TOKYO Editing by Richard Balmforth)