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Written by: Staff
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TOKYO, Mar 27 (Reuters) The dollar slipped in early trade on Monday as investors waited to see whether the Federal Reserve would flag more credit tightening ahead after an expected interest rate rise at this week's meeting.

The yen gained across the board in what some players said could be Japanese investors repatriating funds to get their books in shape before the fiscal year ends this week. However traders played down such talk.

The Fed begins a two-day meeting on Monday and is widely seen lifting rates to 4.75 percent from 4.5 percent in what would be the 15th straight increase in its campaign that helped boost the dollar 15 percent against the euro and yen last year.

''A rate rise in May is more or less factored in but the market is looking for that extra confidence that the Fed will keep raising,'' said Hideaki Inoue, forex manager at Mitsubishi UFJ Trust and Banking.

The dollar has been vulnerable to any evidence suggesting the Fed is set to soon stop, especially as the European Central Bank has made clear its plans to keep raising rates and as the Bank of Japan moves closer to doing so before year end.

Data on Friday showing sales of new U.S. homes plunged 10.5 percent in February, the biggest drop in nearly nine years, were the latest to raise doubts about the Fed outlook and drive the dollar lower.

Futures on the fed funds rate reflect a roughly 75 percent chance the Fed will press on and raise rates to 5 percent at its May meeting, down from about 95 percent two weeks ago.

A lot of uncertainty surrounds this Fed meeting, the first with Ben Bernanke as chair and with two new board members on the Federal Open Market Committee, Randall Kroszner and Kevin Warsh.

The dollar dropped 0.6 percent to 116.90 yen by 0105 GMT, down from 117.45 yen in late New York trade on Friday.

The euro retreated to 140.70 yen from near 141.35 yen but was little changed against the dollar at $1.2030 European central bankers have made clear their worries about inflation flaring up and the need for more credit tightening. The ECB has raised overnight rates to 2.5 percent from 2 percent and is seen pushing rates up possibly as high as 3.5 percent this year.

ECB Governing Council member Christian Noyer told the German business daily Handelsblatt over the weekend that an ongoing economic recovery means risks to price stability are mounting.

High-yield currencies came under fire again as the credit tightening by the Fed and ECB erodes their rate advantage, with the New Zealand dollar taking the biggest hit as an economic slowdown stokes expectations of an eventual rate cut.

The kiwi hit a 22-month low of $0.6065 down 0.5 percent on the day. The New Zealand currency has plunged 8.5 percent so far this month and more than 11 percent this year.

REUTERS PDS

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