LONDON: The euro rose against the dollar on Friday but gains were capped ahead of crucial US economic growth data and after news of a record drop in eurozone inflation.

In late morning London trade, the European single currency rose to 1.4096 dollars from 1.4063 dollars in New York late on Thursday.

Against the Japanese currency, the dollar firmed to 95.65 yen from 95.51 yen late Thursday.

The first estimate of US gross domestic product (GDP) for the April-June quarter will be closely scrutinised for a lead on how the economy in the recession-hit United States is faring.

Analysts expect the report to show a contraction of 1.5 percent annualised, which would be a major improvement after the 5.5 percent slide in the first quarter. The data is slated for release at 1230 GMT.

"Today, markets are going to focus on the publication of the US second-quarter GDP," said Commerzbank analyst Ulrich Leuchtmann.

"Expectations are that we will see a notable improvement on the first quarter, while the figure will remain negative. It is unclear what effects any deviations from this expectation would have on euro/dollar."

Meanwhile, the foreign exchange market digested news of tumbling inflation in the eurozone.

Consumer prices in the 16 euro countries fell a record 0.6 percent in July over one year, after dropping for the first time last month, according to an official EU estimate Friday.

"Euro area annual inflation is expected to be (minus) 0.6 percent in July 2009 according to a flash estimate," the European Union's Eurostat data agency said in a statement. The figure was minus 0.1 percent in June.

After hitting a record high of 4.0 percent in June and July 2008, eurozone inflation has fallen sharply as oil and other commodity prices have collapsed in the face of the global economic downturn.

Most economists had expected that eurozone inflation would dip briefly into negative territory but have ruled out a longer Japanese-like bout of deflation, a pernicious downward spiral in prices.

While the prospect of falling prices may delight consumers, deflation can wreak havoc on the broader economy as households put off purchases in hope of getting a better bargain in the future, undermining demand and in turn investment in new production.

In London on Friday, the euro was changing hands at 1.4096 dollars against 1.4063 dollars late on Thursday, at 134.80 yen (134.33), 0.8519 pounds (0.8527) and 1.5338 Swiss francs (1.5302).

The dollar stood at 95.65 yen (95.51) and 1.0883 Swiss francs (1.0876).

The pound was at 1.6544 dollars (1.6489).

On the London Bullion Market, the price of gold edged up to 935.05 dollars an ounce from 932.50 dollars an ounce late on Thursday.