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Written by: Staff

TOKYO, Mar 28 (Reuters) The yen extended gains on Tuesday, hitting a three-week peak against the euro as Japanese investors continued to shift overseas funds back home ahead of the end of Japan's financial year.

Repatriation flows boosted the Japanese currency for a second session before the fiscal year wraps up on Friday, but traders said the market's overall focus was on a widely anticipated rate rise from the Federal Reserve later in the session.

''We're seeing more last-minute repatriation-related yen buying before the end of the fiscal year, but the market is cautious before the Fed meeting,'' said Kota Kimura, forex manager at Shinkin Central Bank. ''Even if the repatriation does continue, it should be over by tomorrow.'' Traders expect the Fed to raise interest rates by 25 basis points to 4.75 percent, the 15th straight rate rise since mid-2004, when it ends its two-day policy meeting later in the day.

Many market participants see the federal funds rate rising at least through May and were waiting to see the central bank's post-meeting statement for a clearer indication of how long rate rises would continue.

''The market could react if the statement indicates in any way that the tightening cycle is winding down,'' said Shigeru Komatsu, forex dealer at Sumitomo Trust and Banking. ''But the possibility that the Fed will say anything that will shake up the market is very low.'' The meeting will be the first to be chaired by new Fed chief Ben Bernanke, and few in the market expected him to deviate from recent statements that inflation risks remain and the Fed will continue to examine economic data when deciding rates.

The dollar slid about 0.3 percent to around 116.30 yen early in the Tokyo session, after sinking around 1 percent on Monday.

The yen rose to 139.80 yen against the single currency, up about 0.3 percent on the day and hitting its highest level since early March.

Against the euro, the dollar was little changed at $1.2020 after slipping to the day's low around $1.20.

Market participants showed little reaction to comments from Chinese central bank governor Zhou Xiaochuan that it would let the domestic market play a bigger role in the nation's foreign exchange system following the yuan's revaluation last July.

The China Business News reported on Tuesday that China's foreign exchange reserves grew to $853.7 billion at the end of February, overtaking Japan's $850.1 billion and making China's reserves the world's largest.


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