TOKYO, Mar 3 (Reuters) The yen slid against the dollar on Friday after Japanese data showing core inflation picking up to the fastest since March 1998 did nothing to shake expectations the yen would stay a low-yielding currency for a while yet.
Japan's core consumer price index rose 0.5 percent in January from a year earlier, beating forecasts and giving the clearest sign yet that the economy is finally escaping nearly a decade of deflation.
Armed with the data, the Bank of Japan is expected to scrap its super-loose monetary policy, possibly as soon as its policy meeting ending next Thursday. But even after such a move overnight rates are seen holding close to zero.
Most analysts expect a policy shift at one of the BOJ's two meetings in April.
''The end of quantitative easing is not positive for the yen at all, and the market is likely to find out in coming weeks time after having already bought the yen,'' said Toru Umemoto, chief forex strategist for Japan at Barclays Capital.
Japanese institutional investors and importers were good dollar buyers when the U.S. currency hit its lows after the CPI data, which then forced speculators to cover short positions, traders said.
The BOJ is seen ending the quantitative easing policy of flooding the banking system with excess reserves in a step-by-step process while holding the overnight call rate still at virtually zero during the process.
A BOJ increase in overnight rates to 0.25 percent is widely anticipated by year-end, but beyond that investors are unsure how much higher the central bank will push up rates, which have been held below 0.5 percent for more than a decade.
By 0135 GMT, the dollar had gained 0.5 percent on the day to around 116.40 yen, rebounding sharply from a low of 115.56 yen struck on electronic trading platform EBS immediately after the CPI data.
The euro strengthened to 139.90 yen after touching a low near 139.15 yen early in the session.
ECB HELPS THE EURO The single currency slipped to $1.2020, easing from a one-month high of $1.2046 hit the previous session after the European Central Bank raised rates as expected and ECB chief Jean-Claude Trichet warned on inflation risks.
The ECB lifted rates to 2.5 percent, a three-year high, and investors see the central bank pressing on with more credit tightening. Markets are putting a roughly 30 percent chance on rates climbing to 3.25 percent by year end.
Such a series of rate increases might erode the dollar's advantage that powered its 15 percent rally against the euro and the yen last year.
The Federal Reserve has raised rates 14 straight times to 4.5 percent, and upbeat economic data this week have reinforced expectations for the fed funds rate to climb to 5 percent by mid-year.
Some analysts argued that Trichet's comments weren't as hawkish as they might have been.
''I'm sceptical that we're going to get a lot of (euro) upside here,'' said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Connecticut. ''It feels to me it will require something fresh to really get it going again.'' REUTERS DH RAI0719