FOREX-Dollar rises vs euro as European PMI data fails to impress

* Euro zone economy remains weak but green shoots emerging -PMIs

* Pound drops as rate cut remains possible despite better data (Recasts, updates rates, adds comments from after open of U.S. market; new byline, dateline; previous LONDON)

By Saqib Iqbal Ahmed

NEW YORK, Jan 24 (Reuters) - The dollar rose to a near eight-week high against the euro on Friday as lukewarm European PMI data added to the broader market conviction that European central bank policymakers will maintain a loose monetary policy for the near future.

Euro zone business activity remained lackluster with the IHS Markit's Euro Zone Composite Flash Purchasing Managers' Index (PMI), seen as a good gauge of economic health, holding at 50.9 in January but missing the median prediction in a Reuters poll for 51.2.

That followed an earlier PMI from Germany, Europe's largest economy, which showed the private sector gained momentum.

The euro was 0.21% lower against the greenback at $1.1029.

"The move partly reflected a phase of broader euro weakness following the release of the flash Eurozone January PMI data showing a miss in the composite headline, at 50.9, despite a firm German reading," Jonathan Coughtrey, managing director, at Action Economics said in a note.

The survey data comes a day after the European Central Bank did not make any policy change, standing by its pledge to keep buying bonds and, if needed, cut interest rates until euro zone inflation headed back to its goal.

Friday's data added to expectations that a rate hike is ruled out for the rest of the year, with Nordea analysts expecting a 10-basis-point increase only in the second quarter of 2023.

Though there are no expectations for a rate hike from the U.S. Federal Reserve as well for the rest of the year, the 160-basis-point plus interest rate differential in benchmark interest rates between the euro zone and United States is expected to drive the single currency lower.

The euro is set for its worst start to the year in five years, down 1.5% so far this month, and trading at its lowest levels since Dec. 2.

The dollar erased gains against the Japanese yen to trade down 0.15% after the release of January services and manufacturing PMIs from Markit showed the U.S. manufacturing sector continuing to face pressure.

Demand for the safe-haven Japanese yen, remained muted even as China shut a part of the Great Wall and suspended public transport in 10 cities in a bid to contain a virus that has killed 26 people and infected more than 800.

Sterling retreated on Friday, after initially strengthening, as some investors still expected an interest rate cut next week even though business surveys pointed to a post-election bounce in the UK economy. The pound was 0.3% lower against the greenback.

(Reporting by Saqib Iqbal Ahmed; editing by Jonathan Oatis)