By Kevin Buckland
TOKYO, Sept 30 (Reuters) - Sterling rose to a fresh one-week high on Friday, helping to push the U.S. dollar index to a one-week low, as British policymakers moved to undo some of the damage caused by last week's tax-slashing, debt-swelling fiscal plan.
That puts the UK currency on course for its best week in 2 1/2 years.
The euro also jumped to a one-week peak after a heated German inflation reading reinforced expectations for more aggressive policy action from the European Central Bank (ECB).
The British pound touched $1.1222 early in the Asian session, taking it very close to erasing all of the precipitous losses in the aftermath of the new government's so-called mini budget last Friday. It was last up 0.41% at $1.11645, bringing its gain for the week to 2.87%, despite plumbing a record low of $1.0327 on Monday.
"The recovery in cable (the sterling-dollar rate) is very eye-catching," said Sean Callow, a strategist at Westpac in Sydney.
"It makes some sense in that UK yields are set to be high for some time, discouraging short positions. But with the UK already running very large current account deficits, we doubt there is much more upside in sterling."
Overnight, sterling jumped 2.13% as the Bank of England (BoE) conducted a second day of bond buying to stabilise markets, with gilt yields also rising.
Meanwhile, British Prime Minister Liz Truss and finance minister Kwasi Kwarteng will meet the head of the country's independent fiscal watchdog, the Office for Budget Responsibility (OBR), on Friday to discuss the budget forecast process.
Truss also vowed to stick with the controversial plans, in her first comments since the turmoil erupted in markets.
The OBR's involvement is "alleviating fears within the markets of the so-far uncosted fiscal package, helping support GBP," said Tapas Strickland, head of market economics at National Australia Bank.
"A hot German CPI print also serves as a reminder of the inflation situation in Europe - and globally - and that central banks need to remain hawkish. In such a light, the BoE's decision on Wednesday to purchase bonds should not be read as a pivot," Strickland added.
Data on Thursday showed German inflation at its highest in more than a quarter of a century, driven by high energy prices, with analysts warning that the energy crisis has yet to make itself fully felt.
The reading suggests the figure for the wider 19-country euro zone, due on Friday, is also likely to exceed economists' forecasts.
Markets are fully priced for another 75 basis point hike by the ECB next month, with 1-in-3 odds for a full percentage point bump.
For the BoE, traders predict 125 basis points of tightening in early November, with small odds for a 150 basis-point increase.
The euro was slightly higher on Friday at $0.9821, and earlier rose to 0.9844, the strongest level in a week.
The shared currency remains on track for a 1.29% weekly advance, its best showing in four months, after recovering from a fresh two-decade low at $0.9528 from Monday.
The dollar index, which measures the greenback against the euro, sterling and four other major peers, edged 0.09% higher to 111.91, but remained close to a one-week low of 111.64 reached overnight.
That was despite continued hawkish rhetoric from Federal Reserve policymakers, with Cleveland Fed President Loretta Mester saying on Thursday that "price stability is still job one," and inflation must be tamed before officials can worry about the impact on economic growth.
The dollar appreciated 0.14% to 144.65 yen, but is mostly tracking sideways below the psychological 145 line since Japanese officials stepped in to conduct their first yen buying intervention since 1998 last week, when the dollar popped to a fresh 24-year peak at 145.90 yen.
Finance Minister Shunichi Suzuki signalled on Thursday his readiness to intervene again if speculative currency moves persist.
Japan's government will confirm later on Friday the amount it spent on the intervention, and the amount it has left in reserve for further such action.
Elsewhere, the dollar jumped 0.38% to 7.1247 yuan in the offshore market , putting it on track for both its best week and month since April.
The Aussie slipped 0.08% to $0.6495, and New Zealand's kiwi weakened 0.12% to $0.5721, also leaving both on course for their worst monthly performances since April.
(Reporting by Kevin Buckland)