Array

TOKYO, Mar 29 (Reuters) The dollar steadied on Wednesday, keeping broad gains made the previous day after the Federal Reserve raised interest rates and signalled another increase was likely.

The Fed boosted rates by a quarter of a percentage point to 4.75 percent as expected and said in a statement that more policy tightening ''may be needed'', leading many traders to conclude the central bank will raise rates again at the next policy meeting in May.

''The Fed seems still concerned about the risk of inflation,'' said Satoru Ogasawara, economist at Credit Suisse First Boston in Tokyo.

''The dollar is being bought as the market is pricing in a rate hike to 5 percent,'' he said.

Such a rise would likely solidify the dollar's yield advantage over other major currencies, for now. Interest rates are zero in Japan, 2.5 percent in the euro zone and 4.5 percent in the United Kingdom.

At 0240 GMT, the dollar was at 117.85 yen, a tad down from the level in late U.S. trade on Tuesday, when it rose around 1 percent, its biggest gain this year.

The euro was little changed at $1.2005. Its gains following a surprisingly strong reading for an Ifo survey of German business sentiment were wiped out after the Fed's policy decision.

The single European currency stood at 141.45 yen, also little changed from late U.S. levels. The yen staged on Tuesday its largest one-day fall against the euro since early October.

The high-yielding Australian and New Zealand dollars continued to suffer from their diminishing rate advantage over the U.S. currency.

The Australian dollar hit an 18-month low of $0.7020 and the New Zealand dollar struck a 22-month low of $0.6005.

STILL IN RANGE? Traders said there was little follow-up dollar buying in Asia, with many in the market considering the Fed's statement was not strong enough to extend the rally.

The communique released after the Fed meeting, the first with Ben Bernanke as chairman, also said U.S. economic growth is likely to moderate to a more a sustainable pace.

Some analysts took that to suggest that the central bank does not feel pressed to keep raising rates repeatedly, after 15 straight hikes since mid-2004.

''The statement could mean the Fed may wrap up its rate hike campaign in May or June,'' said a trader at a Japanese bank.

With both the Bank of Japan and the European Central Bank seen raising rates later this year, the outlook for a near-term end to the Fed's tightening cycle is not positive for the dollar, he said.

A Reuters poll of 20 Wall Street economists taken after the Fed's latest decision showed 19 expect the Fed to raise rates to 5 percent in May. Thirteen of the economists see the rate peaking at that level.

Many traders say that the Fed provided little impetus to bring the dollar out of the trading range of 115.5 to 119.5 yen and $1.18 to $1.22 per euro it has treaded the past two months.

But some currency analysts see the dollar climbing out of the range against the yen in April, as Japanese investors tend to invest in foreign assets at the start of their new financial year.

Kikuko Takeda, currency analyst at Bank of Tokyo-Mitsubishi UFJ, said that on top of portfolio investments, foreign direct investments (FDIs) by Japanese firms were also pressuring the yen.

''There has been about 600 billion yen ($5.1 billion) of FDIs per month on average in the past year. That is a huge amount given that Japan's trade surplus is about 900 billion yen a month,'' she said.

''I think this trend will continue for now. The dollar is more likely than not to break above its recent range,'' she added.

REUTERS SB KP1019