LONDON, June 14 (Reuters) - The euro was on track for its biggest weekly fall in two months versus the dollar on Friday due to French political turmoil, while the yen clawed back ground after the Bank of Japan (BOJ)surprised markets with a dovish monetary policy update.
The euro is on track for a 1% weekly fall - its biggest since April - and was last down 0.4% on the day at $1.0696.
The euro's weakness has helped drive the dollar higher. The dollar index - which tracks the currency against six peers - was up 0.3% on the day and 0.6% on the week at 105.57.
French markets endured another brutal sell-off on Friday as political uncertainty unleashed the biggest weekly jump in the premium investors demand to hold French government debt since 2011 and bank stocks tumbled.
The country's finance minister, Bruno Le Maire, warned that the euro zone's second-biggest economy faced the risk of a financial crisis if the far right, or the left, were to win parliamentary elections in the coming weeks.
"...unfavourable results in the upcoming elections could exacerbate concerns regarding the sustainability of the country's debt," said Erik-Jan van Harn, senior macro strategist at Rabobank.
Meanwhile, the yen rebounded on the day after earlier falling to a one-month low following the BOJ's decision to hold interest rates and restart bond buying.
In a surprise for markets, the BOJ said it would continue to buy government bonds at its existing pace for now and lay out details of its tapering plan at its July policy meeting.
The dollar gained as much as 0.8% to 158.255 yen, but the move later fizzled out and the dollar was last broadly flat at 156.93.
Currency analysts at MUFG said the BOJ has underscored its cautious approach. "It is more significant from a signalling perspective and again underlines BoJ caution that raises expectations of a 'go-slow' reversal of the BOJ's ultra-easy stance," they said in a note.
BOJ governor Kazuo Ueda said at a briefing the central bank was "paying close attention" to the impact of the weak yen on inflation, adding a rate hike in July was a possibility depending on economic data.
U.S. employment data on Thursday added to bets the Federal Reserve could kick off its easing cycle in September, but analysts said the euro's weakness was the main factor driving currency markets this week.
The single currency has weakened across the board this week. It fell to its lowest on the Swiss franc in three months on the day, down 0.4% at 0.956.
Sterling was on track for its biggest weekly gain against the euro in nearly seven months. Against the dollar, the pound was down 0.5% at $1.27040.
(Reporting by Iain Withers in London and Rae Wee in Singapore, Editing by Shinjini Ganguli and Frances Kerry)
