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The yen strengthened on Friday as speculation mounts that the Bank of Japan could tweak its yield curve control policy later in the day, while the dollar held on to its overnight gains after better-than-expected U.S. economic data.

The BOJ is widely expected to keep ultra-low interest rates later on Friday but investors are eyeing the possibility it makes minor tweaks to extend the lifespan of its yield control policy.

The Nikkei newspaper reported the central bank will maintain its 0.5% cap for the 10-year government bond yield, but discuss allowing long-term interest rates to rise above that level by a certain degree.

The Japanese yen strengthened as much as 0.55% to 138.72 per dollar before losing steam to trade at 139.37 on Friday. The currency is up about 2% against the dollar this week.

"The Nikkei report really just came out of the blue," said Carol Kong, a currency strategist at Commonwealth Bank of Australia, noting that given the sharp sell off in the dollar/yen an announcement from the BOJ will unlikely further weigh on the currency pair.

"I think markets will also pay close attention to what the rationale is," she said. "It will probably be about improving the bond market functioning like the previous move in December."

The BOJ last December stunned the market by widening the yield band and allowing the 10-year yield to rise by up to 0.5%.

The BOJ decision caps a busy week for global central banks. The story so far has been of policymakers sticking to expectations with the Federal Reserve and the European Central Bank hiking by 25 basis point each earlier in the week.

However, the ECB raised the possibility of a pause in September as inflation pressures show tentative signs of easing and recession worries mount.

"There is the possibility of a hike (next time). There is the possibility of a pause. It's a decisive maybe," ECB President Christine Lagarde said on Thursday.

The comments from Lagarde sent euro 1% lower on Thursday. The single currency was little changed at $1.09775 on Friday in Asian hours.

On Wednesday, the Fed kept the door open to more rate hikes, but Fed Chair Jerome Powell gave few hints about the September meeting.

"Both central banks have retained a hawkish bias, but the Fed looks more likely to hike again while the data is telling us the ECB is probably done," said Rodrigo Catril, senior currency strategist at National Australia Bank.

Data overnight underscored the challenge faced by the Fed, with the U.S. economy growing faster than expected in the second quarter as labour market resilience underpinned consumer spending, while businesses boosted investment in equipment.

A separate report from the Labor Department showed initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 221,000 for the week ended July 22, the lowest level since February. Economists had forecast 235,000 claims.

Against a basket of currencies, the dollar shot up 0.059% at 101.74, having risen 0.66% overnight.

The Australian dollar fell 0.12% to $0.670, while the kiwi lost 0.23% to $0.617.