NEW YORK/LONDON (Reuters) -The dollar pared gains on Friday after a slightly bigger increase in U.S. producer prices in July sent Treasury yields higher to bolster the U.S. currency even as expectations grow that the Federal Reserve is at the end of hiking interest rates.

The producer price index for final demand rose 0.3%, the Labor Department said, as data for June was revised lower to show the PPI unchanged, instead of rising by a previously reported 0.1%.

In the 12 months through July, the PPI edged up a modest 0.8% after gaining 0.2% the prior month. The PPI was forecast to climb 0.2% on the month and advance 0.7% year-over-year, a Reuters poll of economists showed.

A 0.5% increase in the PPI for services, the biggest gain since last August, drew attention but that’s because it contains the volatile retailer and wholesaler margins component, said Thierry Wizman, global FX and currencies strategist at Macquarie in New York.

Concerns that rising energy costs will push up the consumer price index (CPI) are misplaced as PPI for energy was 0.0% on the month, Wizman said.

“Everyone’s concerned now about headline CPI being high because of energy prices, (but) you can’t really get overly worked up about that if PPI final demand is 0.8%, right?”

The CPI data on Thursday showed consumer inflation rose 0.2% last month, matching the gain in June, and by 3.2% in the 12 months through July.

Futures traders now place an almost 90% chance that the Fed leaves its benchmark interest rate at its current range of 5.25-5.5% when policymakers meet in September. Prior to the inflation data, that chance was already above 85%.

The dollar index, a measure of the greenback against six peers, fell 0.049%, paring gains that had pushed up the index from earlier declines before the PPI data was released.

The dollar index is headed to a fourth straight week of gains, up about 2.5% after bouncing off a 15-month low in mid-July as Treasury yields rose on the government’s recent large issuance of debt.

The Treasury sold $103 billion of notes and $410 billion of bills this week.

“The reason yields are going up is because everyone’s so worked up about a very heavy issuance schedule from the U.S. Treasury,” Wizman said. “The speculators have gone short the bond in anticipation of all this.”

The stronger dollar has put the Japanese yen on course to test a key support level, though liquidity was thin with Japan on holiday on Friday.

The dollar was last at 144.71 yen, down 0.01% on the day after earlier hitting 144.89, its highest since June 30 when it briefly breached 145, a level at which investors think the Bank of Japan might start warning of intervention.

“You should expect the rhetoric once yen gets to 145,” said Bank of Singapore currency strategist Moh Siong Sim. “I think the market will get a lot more careful as we get to that level.”

Japan intervened in currency markets last September when the dollar rose past 145 yen, which prompted the Ministry of Finance to buy the yen and push the pair back to around 140 yen. The yen is down over 9% against the dollar for the year.

Meanwhile, sterling rose for the first time in four days after data showed the British economy grew more than expected in June, allaying some concern about the impact of high inflation and high rates on activity.

The pound was last trading at $1.2723, up 0.38% on the day, but was still heading for a fourth weekly drop. [GBP/]

Elsewhere on Friday the euro slid 0.01% to $1.0978 and the dollar fell 0.13% against the Swiss franc.