By Peter Nurse

- The U.S. dollar edged lower in early European trade Thursday, but volatility is limited ahead of weekly employment and quarterly growth data which could provide clues for future Federal Reserve action.

At 03:15 ET (07:15 GMT), the , which tracks the greenback against a basket of six other currencies, traded just lower at 102.260 and is on course to drop 2% in March.

Receding concerns over the banking sector have resulted in traders switching their attention to the Federal Reserve's battle against inflation.

Friday sees the release of the Fed's favorite gauge of inflation, the , but ahead of that comes the release of weekly data and the preliminary fourth quarter , providing further clues about economic activity in the world's largest economy.

Markets are currently pricing in a 60% chance of the standing pat on interest rates in May, according to the CME FedWatch tool, but that number was a lot higher last week in the midst of the banking crisis.

edged lower to 1.0839, after inflation data from Germany's most populous state, North Rhine-Westphalia, showed growth of in March, an . This represented a substantial slowing of growth from the annual rise of 8.5% the prior month.

Additionally, rose 3.3% on an annual basis in March, a hefty slowing from 6.0% in February.

The official release is due on Friday.

"With the European Central Bank explicitly data-dependent despite an implicit hawkish bias, this week's inflation figures are set to be an important driver of the market's rate expectations," said analysts at ING, in a note. "There are currently two 25bp rate hikes fully priced in by September in the OIS curve, and the bar for another hawkish repricing is set quite high."

rose 0.2% to 1.2341, risk-sensitive rose 0.4% to 0.6711, while fell 0.4% to 132.28, with the safe-haven yen recovering after suffering steep overnight losses.

While volatility has lessened in the last few days, the global currency market is vulnerable to a liquidity crunch later this year as financial conditions tighten and economic growth slows, Bank of America said.

"The lagged effect of bank-credit tightening has yet to fully play out and the economic cycle is likely entering a contractionary phase for growth," they said.