* Dollar steady after fall on trimmed rate hike expectations
* Dealers expect Fed to keep rates on hold in coming months
* Euro hits record high vs yen
By Rika Otsuka
TOKYO, June 26 (Reuters) - The dollar steadied against the
euro on Thursday after falling the previous day as a Federal
Reserve statement prompted investors to trim expectations for an
imminent interest rate rise to fight inflation.
Against the yen, the euro hit a record high after European
Central Bank officials on Wednesday warned about persistently
high inflation rates, reinforcing expectations the ECB will boost
interest rates next month.
The U.S. central bank on Wednesday left the benchmark fed
funds rate at 2 percent, effectively ending one of its most
aggressive rate cutting campaigns to limit the economic fallout
from the housing and credit crisis.
The Fed voiced greater concerns about inflation in a
statement following its two-day policy meeting but also said it
expected price pressures to moderate this year, helping push back
rate hike expectations.
"The dollar slid as the Fed gave no hint about when it was
likely to lift rates," said Shuichi Kanehira, a senior trader at
Mizuho Corporate Bank.
"The dollar is likely to stay on a downward trend against the
euro for now," he said.
A Reuters survey, taken shortly after the Fed rate decision,
showed all 16 primary dealers polled expect the central bank to
stand pat at its next policy meeting in August. []
Despite subdued expectations for a rate rise in the near
term, the market still thinks the Fed's next rate move will be to
hike rates as oil holds near record highs, causing energy prices
to surge.
According to U.S. interest rate futures, the chance of the
Fed raising rates to 2.25 percent in September is fully priced in
the market. <FEDWATCH>.
The euro was little changed from late U.S. trading on
Wednesday at $1.5677 <EUR=>. The pair has been trapped in a
$1.5285-$1.5844 range for about two months.
A break on either side of that range would determine the
long-term direction for the pair, traders said.
YEN SLIDES
Against the Japanese currency, the dollar was steady at
107.92 yen <JPY=>. Solid demand from Japanese importers who have
missed chances to buy dollars during its rise versus the yen in
the past few months, helped lift the dollar, traders said.
The euro rose 0.2 percent to 169.20 yen <EURJPY=R>, hovering
near a record high of 169.33 yen hit on trading platform EBS
earlier.
The Japanese currency has been hurt by expectations that the
Bank of Japan will keep interest rates at a low 0.5 percent for a
while due to weakness in the domestic economy.
The ECB is widely expected to raise rates to 4.25 percent at
its next policy meeting on July 3 in a quest to combat inflation.
The yen also slid against other higher-yielding currencies,
with the Australian dollar <AUDJPY=R> hitting seven-month highs
around 103.60 yen, while the Swiss franc matched a 17-year high
of 104.29 yen <CHFJPY=R> that was first hit last week.
The yen's weakness is partly due to Japanese retail demand
for uridashi bonds, said Tohru Sasaki, chief foreign exchange
strategist for JPMorgan Chase Bank in Tokyo. Uridashis are
foreign currency bonds sold to Japanese household investors.
[]
A bigger culprit, however, may be a pick-up in overseas
investment by Japanese companies, Sasaki said.
"Foreign direct investment is proceeding at a pretty decent
pace this year," he said, adding that one recent example was
Sumitomo Mitsui Banking Corp's decision to take a stake in
British bank Barclays. []
(Additional reporting by Masayuki Kitano; Editing by Hugh
Lawson)
