* Dollar/yen extends rally, hits 12-day high as US yields rise
* USD capped vs euro as German yield spike neutralises support
* Sterling hits 1-year high after robust UK inflation data
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Sept 13 (Reuters) - The dollar steadied on Wednesday, with investors expecting another quiet day for the currency ahead of key inflation data due on Thursday that will be closely watched by the U.S. Federal Reserve as it considers when to raise interest rates.
With most currencies trading in narrow ranges, Britain’s pound was in focus, hitting a one-year high above $1.33 and a six-week high on a trade-weighted basis.
Sterling was building on a move higher the previous day on the back of strong UK inflation data, which drove expectations that the Bank of England would not wait too long before raising interest rates.
The dollar was trading down 0.1 percent on the day against a basket of major currencies at 91.758, just above a 2-1/2-year low touched last week.
“Everyone’s waiting for the inflation data tomorrow and the Fed next week,” said Commerzbank currency strategist Esther Reichelt, in Frankfurt.
“Now it’s ‘wait and see’ for U.S. dollar investors,” she said, adding that the only other factor that would be likely to trigger a significant move would be any further escalation of tensions around North Korea.
The greenback slumped to a 10-month low of 107.320 yen on Friday, when Hurricane Irma threatened Florida and as financial markets braced for the possibility of another missile or nuclear test by North Korea for the Sept. 9 anniversary of its founding.
Since then, risk aversion has ebbed significantly, prompting an increase in U.S. Treasury yields to two-week highs.
The dollar was a shade lower at 109.95 yen after rising earlier in the session to 110.295, its highest since Sept. 1.
“Dollar/yen shows the highest correlation to U.S. yields and the pair is benefiting from the latest rise in yields,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities. “Covering of dollar short positions created by macro-driven funds has been rapid and aggressive under such conditions.”
The euro added to modest gains the previous day and was last up 0.1 percent at $1.1984.
Bitcoin was down almost 5 percent, just below just below $4,000, after Jamie Dimon, chief executive of JPMorgan Chase & Co, said the cryptocurrency is a “fraud” and would blow up.
While the U.S. 10-year Treasury note yield rose about 5 basis points overnight, its German bund counterpart also jumped nearly 7 basis points, helping prevent the dollar from gaining on the euro.
German bund yields have risen as safe-haven government debt came under pressure following a respite in North Korea tensions.
The euro rose to a 2-1/2-year high of $1.2092 last week after a policy meeting by the European Central Bank gave bulls cause for short-term optimism towards potential policy tapering, and after ECB President Mario Draghi failed to aggressively talk down the buoyant currency.
Reporting by Jemima Kelly; Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Keith Weir