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Written by: Staff
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TOKYO, Mar 30 (Reuters) The dollar was steady on Thursday, gaining support from the Federal Reserve's signal this week that the central bank is not quite finished raising interest rates after 15 straight increases.

The yen briefly slipped against the dollar and the euro after data showed industrial production in Japan fell 1.7 percent in February from the previous month, the first drop in seven months and much bigger than forecasts for a 0.1 percent dip.

But analysts said the output figures were distorted by a slowdown in Asian trade around the Lunar New Year and that the outlook for production and exports was still upbeat.

Building expectations that Japanese investors would start to put money to work in foreign bonds as the new business year kicks off next week also hobbled the yen.

Toru Umemoto, chief forex strategist at Barclays Capital in Tokyo, said Japanese institutional investors would likely buy foreign bonds on an unhedged basis in the new fiscal year when the dollar slips below 115 yen, providing support to the U.S. currency.

''They are very likely to increase foreign bond investment in the first half of the fiscal year,'' Umemoto said.

Even as yields on benchmark Japanese government bonds have surged to 19-month highs on worries about the Bank of Japan raising interest rates as soon as July, they remain a full 300 basis points below comparable yields on U.S. Treasuries.

The yen has benefitted little from Japanese portfolio managers bringing cash home to dress up their books before the end of the current fiscal year, or from the Nikkei share average topping 17,000 on Thursday for the first time in five and a half years.

Data from the Finance Ministry showed Japanese investors sold a net 664.6 billion yen of foreign bonds last week and have unloaded a whopping 2.75 trillion yen ($23.35 billion) worth over the past three weeks.

The looming end to Japan's fiscal year on Friday kept currencies subdued.

In early trade, the dollar was little changed at 117.80 yen after having rebounded from a low of 116.26 yen hit earlier in the week as Japanese investors repatriated funds.

The dollar has been stuck between 115.50 yen and 119.50 yen over the past few months.

The euro was also little changed at 141.70 yen and $1.2035.

For the year the dollar has slipped about 1.5 percent against the euro but is flat against the yen as the top three major currencies remained locked in ranges.

The outlook for short-term interest rates is still the dominant theme for currencies, and for now all signs point to rates climbing further in the United States, euro zone and eventually Japan.

Most analysts expect the yen to strengthen this year as the BOJ finally raises rates, more Japanese investors keep cash invested at home and as China allows the yuan to strengthen more in response to rising angst in the U.S. Congress.

U.S. Treasury undersecretary Timothy Adams told a Senate committee on Wednesday that China's central bank chief agrees that Beijing should move more quickly to increase the flexibility of its currencies, briefly boosting the yen.

China revalued the yuan by 2.1 percent last July but has allowed it to rise only a bit more than 1 percent since. But this month the yuan has showed signs of trading more loosely.

REUTERS SK RN0708

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