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Dollar stuck, looks to U.S. CPI for inspiration

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TOKYO, Feb 22 (Reuters) The dollar edged up on Wednesday but was confined to ranges against major currencies as traders look to see whether inflation data later in the day reinforces expectations for more Federal Reserve interest rate increases.

The minutes of the Fed's Jan. 31 meeting released on Tuesday showed officials felt further rate rises might be needed to prevent price pressures from picking up but also said the central bank's policy stance was ''close to where it needed to be''.

Altogether the minutes were enough to back the market's belief that the Fed is likely to raise rates at least two more times, taking the fed funds rate to 5 percent from the current 4.5 percent by mid-year.

But with the European Central Bank also raising overnight rates and even the Bank of Japan close to scrapping its five-year old policy of flooding money markets with cash and holding rates close to zero, the dollar has gained little.

''The Bank of Japan is expected to raise rates within the next year, but even if they do, it's not going to be by very much,'' said Kota Kimura, forex trading manager at Shinkin Central Bank.

''At the same time, even with (Ben) Bernanke leading the Fed, the market is expecting at least a few more rate rises in the U.S., so any way you look at it, the dollar will maintain its rate advantage for a while.'' The U.S. consumer price index for January due at 1330 GMT should help to clarify the Fed outlook. In a Reuters poll, economists forecast a hefty 0.5 percent rise in the CPI from the previous month due to higher gasoline prices.

The core CPI, which strips out food and energy prices and is more closely watched by policy makers, is seen rising 0.2 percent from December and keeping the year-on-year pace above 2 percent -- the top of the Fed's perceived comfort zone.

In comments late on Tuesday, Dallas Fed President Richard Fisher said monetary policy would be more data-driven going forward and the central bank would be on the lookout for steep energy prices spilling into consumer costs.

By 0105 GMT, the dollar was changing hands at 118.80 yen, up from 118.70 yen in late New York trade.

Traders said the dollar's gains were limited by Japanese exporters selling just below 119 yen as well as market players defending barrier options at that level.

The euro also edged up to 141.55 yen from 141.40 yen.

Against the dollar, the single currency was little changed around .1910 trapped within a broad range between .18 and .23 since mid-December.

Sterling was flat at .7455.

Despite the BOJ's looming policy change as the economy finally pulls free from nearly a decade of deflation, the yen has lost ground as domestic investors keep flocking to higher-yielding currencies for better returns.

Even the sharp rebound in the Nikkei share average the previous session, with gains of nearly 3 percent, did little to help the yen. The Nikkei was down 0.2 percent on Wednesday.

The Japanese government will release its economic report for February later in the day, and some in the market expect the government to upgrade its assessment.

REUTERS PDS RAI0715

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