TOKYO, Feb 23 (Reuters) The yen rose on Thursday after the Bank of Japan governor reiterated the central bank would eventually raise interest rates, reigniting worries that the dollar's yield advantage will erode this year.
Toshihiko Fukui told the Japanese parliament that the BOJ would keep extremely low interest rates after ending its policy of flooding the financial system with cash, but then start moving to neutral rate levels.
''It seems (Fukui) intended to remind the market that something would happen after an end to the quantitative easing policy,'' said Daisuke Uno, market strategist at Sumitomo Mitsui Banking Corp.
Traders said that market players had seized on Fukui's comments -- taken as his strongest warning yet that Japanese rates will have to rise from near zero -- to sell the dollar after the U.S. currency shuffled in a tight range below 119 yen this week.
By 0655 GMT, the dollar was buying 117.50 yen, down more than a yen from the day's high of 118.55 yen marked on electronic trading platform EBS.
Traders said the dollar's fall against the yen was accelerated as stop-loss sell orders were struck on the U.S.
currency's way down.
The euro fell nearly 1 percent to 139.95 yen.
The single currency was little changed at .1915. The unit has been trapped within a broad range of .18 to .23 since mid-December.
CPI, CARRY TRADES The dollar had edged down against the yen in early Asian trade after closely watched U.S. consumer prices data did little to alter expectations that U.S. rates will likely peak by the middle of the year.
The data on Wednesday showed core consumer prices, which exclude volatile food and energy prices and are watched by the Fed in making policy decisions, rose 0.2 percent from a month earlier, in line with forecasts.
''The market had expected stronger inflationary pressures, so it was natural that players pared back some of their long dollar positions,'' said Tatsuro Karitani, a senior trader at Mizuho Corporate Bank.
''But the data also supported market expectations for two more rate increases in coming months,'' he said.
The Fed is widely expected to boost overnight rates to 4.75 percent in March from the current 4.5 percent, with more market players forecasting the rate to climb to 5 percent by mid-year.
The yen also got a lift from the unwinding of carry trades amid growing concerns about an economic slowdown in some high-yielding countries, such as New Zealand, dealers said.
In carry trades, investors borrow in low yielding currencies, like the yen, to invest in high-yielding assets offered elsewhere.
''There is a considerable amount of unwinding of carry trades, which is pushing down such currencies against the yen,'' said a trader at a Japanese trust bank.
Karitani at Mizuho said that Japanese retail investors, who had been paring long positions in the kiwi since late last year, have yet to accelerate their selling in full-force. But if the kiwi slips below 77 yen, it could trigger selling of other higher-yielding currencies against the yen, he said.
The New Zealand dollar was trading at 77.55 yen on Thursday.
It was buying 66.05 U.S. cents after falling to a 17-month low of 65.63 cents on Wednesday.
REUTERS CS SP1247