TOKYO, Mar 2 (Reuters) The dollar edged up against the yen on Thursday on an upbeat reading for U.S. manufacturing that gave credence to market beliefs that the Federal Reserve will raise interest rates twice more before mid-year.
The U.S. currency was also seen supported as market excitement calmed on the prospects of a Bank of Japan move to a tighter monetary policy.
The dollar had fallen around 3 yen since the middle of last week on expectations the BOJ would soon end its ultra-loose monetary policy of flooding the banking system with cash.
''If you try to put a macro story with (Wednesday's) moves, it would be caution about how the BOJ is going to move and when they're going to move,'' said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo.
The quantitative easing policy is widely expected to come to an end in April, though some analysts see an exit as early as next week's BOJ board meeting, while rates in Japan are seen rising from near zero before the year is out.
In early Asian trade, the dollar inched up to 116.20 yen from around 116.10 yen in late U.S. trading on Wednesday. Earlier that day it had marked a one-month low of 115.45 yen during Tokyo time on electronic trading platform EBS.
The euro was little changed at $1.1920 Its failure to break above the peak of its recent range at $1.1975 was seen contributing to the dollar's recovery in the previous session.
The European currency was also flat at 138.45 yen The Institute for Supply Management's manufacturing index for February on Wednesday came in above economists' consensus forecast, countering a tepid U.S. core inflation index for January that had triggered a mild dollar sell-off.
That lent weight to forecasts the Fed could boost its funds rate to 5 percent by the middle of the year after an expected rise to 4.75 percent in March.
Amid quiet trade, market focus has turned to the European Central Bank's verdict on monetary policy, due at 1245 GMT.
But with a rate rise to 2.5 percent already priced into the euro, traders were more interested to see if ECB President Jean-Claude Trichet gives any clues about further rate increases in his post-meeting news conference.
''I think it's discounted, unless they do something and do something decisive,'' said Waddington at Royal Bank of Scotland.
REUTERS DH RAI0729