* Dollar off lows vs yen but U.S. economic weakness in focus
* Aussie slips after RBA signals more rate hikes unlikely
* June ISM factory activity index set to show contraction
By Masayuki Kitano
TOKYO, July 1 (Reuters) - The dollar slid against the yen on
Tuesday but was off a three-week low hit the previous day, its
outlook clouded by worries about the U.S. economy's weakness.
The Australian dollar fell against the dollar and the yen
after the central bank kept interest rates unchanged at a 12-year
high of 7.25 percent as expected, and signalled more rate hikes
were unlikely in the near term. []
The yen edged higher against the dollar and the euro on
Tuesday as the Bank of Japan's closely watched tankan quarterly
survey showed a smaller-than-expected decline in Japanese
business sentiment. []
But its impact was limited as the data still showed
confidence among big Japanese manufacturers at a five-year low,
and did little to alter market expectations that the BOJ would
hold interest rates at 0.5 percent for a while.
Instead, the market was seen likely to keep focusing on the
U.S. economy, concerns about lingering fallout from the credit
market turmoil and the outlook for U.S. and euro zone interest
rates.
"The dollar's weakness remains the market's theme," said a
trader for a major Japanese bank.
"The U.S. economy's relative weakness is likely to become
clearer," he said.
The National Association of Purchasing Management-Chicago
survey showed on Monday that conditions in the Midwest region
contracted for a fifth straight month. []
The dollar slipped 0.3 percent to 105.81 yen <JPY=>, though
it has rebounded from a three-week low of 104.99 yen struck on
trading platform EBS on Monday.
The Australian dollar fell 0.3 percent to $0.9545 <AUD=D4>,
having retreated from a 25-year high of $0.9668 hit on Monday.
The Aussie was down 0.6 percent at 100.95 yen <AUDJPY=R>.
In a statement following its policy meeting, the Reserve Bank
of Australia pointed to more signs of weakness in demand, leading
the market to price in less risk of further tightening.
"Australian dollar buying on the back of expectations for
higher interest rate is likely to lose its momentum, although it
is a bit too early to say a rally in the currency has run its
course," said a senior trader at a U.S. bank.
FOCUS ON US DATA
The euro was little changed from late Monday U.S. trade at
$1.5751 <EUR=>, having slipped from a three-week high of $1.5836
hit on Monday.
The single European currency was supported by market
expectations for the European Central Bank to raise rates by 25
basis points to 4.25 percent at a policy meeting on Thursday, and
possibly further beyond that.
Data on Monday showed that euro-zone consumer prices jumped
to a record high 4.0 percent in June, double the ECB's 2 percent
target.
Given the jump in euro zone inflation, the chance of further
ECB rate rises beyond the expected rise this week will likely
linger and support the euro, market players said.
By contrast, the dollar was seen likely to be held back by
receding market expectations for the Federal Reserve to raise
U.S. rates later this year.
Although the Fed has grown more worried about inflation,
investors are starting to doubt whether the central bank will
raise rates soon given signs of economic weakness and lingering
fallout from the credit market turmoil.
Investors will be focusing on U.S. data due this week
including key jobs on Thursday and a reading on factory activity
later on Tuesday.
Economists polled by Reuters forecast that the Institute for
Supply Management's index of manufacturing activity will show a
contraction for a fifth consecutive month in June.
"The ISM data could be crucial since the dollar fell last
week on worries about corporate earnings," said Koji Fukaya, a
senior currency strategist for Deutsche Securities.
(Additional reporting by Rika Otsuka; Editing by Michael
Watson)
