By James Ramage

The dollar rose against the yen and pared losses against the euro on Friday after data showed the U.S. economy grew modestly over the last three months of 2014, topping forecasts and holding firm expectations for higher interest rates.

The dollar climbed 0.3% to 119.72 yen, while the euro traded flat at $1.1197, shedding its earlier gains.

U.S. gross domestic product grew at a 2.2% annual rate for the fourth quarter of 2014, the Commerce Department said. The number slipped from the initial estimate of 2.6% reported last month but beat economists' expectations of 2% growth.

Some of the underlying numbers were positive, said Dean Popplewell, chief currency analyst at the retail brokerage Oanda Corp. American consumers boosted spending by 4.2%, likely benefiting from robust job creation and lower gasoline prices. Though the number dipped a shade lower than the initial estimate, household spending remained at its highest level since the last three months of 2010.

In addition, businesses spent more on software, research and equipment than initially reported, as investment spending expanded at a 4.8% rate, up from the previous estimate of 1.9%. Taken in full, the report keeps alive the possibility for the Federal Reserve to start raising interest rates around midyear, something the market has predicted is more likely to happen closer to September, Mr. Popplewell said.

"I'd say the dollar got a small boost from these underlying factors," Mr. Popplewell said. "The outlook for future demand to contribute to growth continues to look positive for 2015."

The Federal Reserve has signaled it would increase rates in the U.S. when it was confident the data, particularly for jobs and inflation, showed the economy's recovery stood on firm footing. Higher interest rates would increase returns on dollar-denominated assets, making the U.S. currency more alluring to yield-hungry investors.

Next week, investors expect a heavy calendar of central-bank meetings and the U.S. jobs report for February to provide direction for many developed-market currencies that have been trading in tight ranges over the past two months.

Write to James Ramage at james.ramage@wsj.com