By Alun John

LONDON (Reuters) – The dollar edged up on Thursday, extending its gains from the previous day as investors looked ahead to U.S. labour and inflation data for any softness that could signal slowing U.S. rate hikes and weaken the greenback after months of strength.

The euro EUR=EBS> was down 0.27% to $0.9859, falling a little after the release of European Central Bank minutes from last month’s meeting that showed policymakers were worried that inflation could get stuck at exceptionally high levels.

Sterling was down 0.6%, while the dollar was steady versus the Japanese yen and Swiss franc.

Currency markets have struggled to find a clear direction this week, following a dramatic third quarter. The dollar initially slid against most majors, before regaining ground.

“Sentiment was very downbeat in late Q3, couldn’t go anywhere but up, and did go up in early Q4, triggered by the Bank of England intervening (in British government bond markets),” said Stephen Gallo European head of FX strategy at BMO capital markets.

“That’s where we are now. We don’t really have fundamentally good reasons to be buying sterling, euro or yen aggressively but we all know the dollar is expensive and maybe the Fed is wrong, and it is going to have to pivot.”

The dollar index was 0.3% higher, down from a 20-year peak of 114.78 hit in late September

A major factor driving currency markets currently is changing expectations of how aggressively central banks’ – particularly the Federal Reserve – will raise interest rates.

A key question is whether they will pivot from primarily worrying about inflation, and hence raising rates aggressively, to also considering slowing economic growth, leading to more cautious rate hikes.

This means U.S. jobs data due on Friday and inflation figures next week will be closely watched.

“Investors will be looking (in Friday’s payrolls report) for signs of anything that might cause the Fed to do an early pivot, everything they say suggests they have no intention of doing so, but I suspect there are people out putting these pivot trades on,” said Gallo.

U.S benchmark treasury yields whose gains on Wednesday had helped drive the greenback higher, were steady on Thursday. [US/]

The Australian dollar was down 0.5% at $0.6455, still struggling after an unexpectedly modest 25 basis point hike in Australia.

Also a factor in markets was the Saudi Arabia-led cartel of oil producers having agreed to steep production cuts on Wednesday, lifting Brent crude futures to a three-week high of $93.99 a barrel. [O/R]

That helped the Norwegian crown and Canadian dollar outperform most peers, while hurting currencies like the euro and pound.

“Higher energy prices would have a much more direct impact on the European region given the more direct relationship to their finances,” said NatWest Markets’ strategist Jan Nevruzi.

(Reporting by Alun John in Hong Kong and Tom Westbrook in Sydney; Editing by Kim Coghill and Hugh Lawson)