By Rae Wee

SINGAPORE The yen edged steadily higher on Monday following a volatile session at the end of last week after the Bank of Japan (BOJ) loosened its grip on interest rates, and was on track to reverse three consecutive months of loss.

The U.S. dollar was conversely headed for a monthly loss on the prospect that the Federal Reserve's aggressive rate-hike cycle - a key driver of the dollar's strength - could have concluded with last week's 25-basis-point increase.

The yen was last roughly 0.3% higher at 140.77 per dollar, nursing some of its heavy loss from Friday after the BOJ maintained ultra-low rates, though made its bond yield curve control (YCC) policy more flexible and loosened its defence of a long-term rate cap.

That sent the yen into a tailspin as traders tried to determine the implications of the move. The dollar eventually ended the session with a 1.2% gain against the Japanese currency, though that was after it had slid 1% to a session-low of 138.05 yen.

"The BOJ threw a curve ball into the market on Friday with its cosmetic change to YCC - in essence, it was a brilliant move by the central bank, and they've managed to bridge the volatility that would come with a straight change to a -/+ 1% range in the YCC band," said Chris Weston, head of research at Pepperstone.

"They've given themselves all the flexibility should they wish to tighten policy in the future without tidal waves in global bond markets."

Elsewhere, the dollar edged broadly lower in early Asia trade, with the dollar index steadying at 101.62.

It was headed for a monthly decline of roughly 1.2%, extending its loss to a second month.

Data on Friday showed that the annual U.S. inflation rate rose at its slowest pace in more than two years in June, with underlying price pressure receding, easing pressure on the Federal Open Market Committee (FOMC) to continue raising rates.

"All of the data continues to support a 'Goldilocks' scenario in the U.S. economy," said currency strategist Carol Kong at Commonwealth Bank of Australia (CBA).

"In the near term, the dollar might be heavy, weighed down by the market's view that the FOMC is done with its tightening cycle."

The euro rose 0.05% to $1.1020 and was eyeing a monthly gain of about 1%, though last week's European Central Bank policy meeting similarly raised the possibility of a rate pause in September.

Sterling gained 0.04% to $1.2854, ahead of the Bank of England's policy meeting this week where expectations are for a quarter-point rate hike.

In Asia, China's July purchasing managers index (PMI) figures are due later on Monday, which will provide further clarity on the state of the world's second-largest economy.

"I expect those to continue to paint a picture of a soft Chinese economy," said CBA's Kong. "The overall picture will still be pretty gloomy and I think the numbers will call for more policy support from the government."

The Australian dollar, which is often used as a liquid proxy for the yuan, was last 0.26% higher at $0.66645, while the New Zealand dollar gained 0.28% to $0.6170.

(Reporting by Rae Wee; Editing by Christopher Cushing)