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Written by: Staff

TOKYO, Apr 4 (Reuters) The dollar rose against the yen on Tuesday on expectations that Japanese investors will invest more of their money in higher yielding foreign assets in the new business year that kicked off this week.

The dollar slipped the previous day on weaker than expected manufacturing data that raised concerns about a slowdown in U.S.

growth, further eroding the gain to a three-week high against the yen earlier in the session.

Traders said that Japanese institutional investors' buying of foreign assets at the start of the fiscal year is usually greatest in the second or third week of April, meaning the dollar will likely enjoy firm support throughout the month.

After rising to 118.80 yen on Monday, sell orders that had been placed above 118 yen are now nearly gone, clearing the way for the U.S. currency to climb higher, traders said.

''The dollar's rise could gain momentum once Japanese investors start buying in full force because their foreign asset allocations still favour dollars more than the euro or other currencies,'' said Mitsuru Sahara, senior trader at Bank of Tokyo-Mitsubishi UFJ.

In early Tokyo trade, the dollar was at 117.85 yen, up from around 117.70 yen in late U.S. trade.

The euro marked a fresh two-month high of 143.09 yen, inching closer to a record high above 143.62 yen.

The single European currency was little changed at $1.2135.

The yen's weakness could also become more pronounced due to carry trades with the euro, as the European Central Bank is seen on track to raise interest rates further, traders said.

In such carry trades, investors borrow the low yielding yen to invest in higher yielding currencies.

In sharp contrast to a surprising fall in the Institute for Supply Management's U.S. manufacturing activity index for March, a separate survey showed that euro-zone manufacturing grew at its fastest pace in more than five years in the same month.

The ECB is widely expected to leave rates unchanged at its policy meeting on Thursday, but traders said the latest economic data supported a view the ECB will signal in its post-meeting news conference that it will hike rates in May.

''The ECB has been the laggard in raising interest rates compared with the U.S. Federal Reserve, so the euro is relatively easy to buy, especially against the yen,'' said Sahara at Bank of Tokyo-Mitsubishi.

He added that the euro could hit the record high against the yen in coming sessions.

The dollar was expected to stay in recent ranges ahead of U.S. jobs data due on Friday.

Traders said that while Japanese exporter selling pressure was strong, the dollar was more likely to test its upside towards 119 yen than to fall to around 115 yen in the near term.

Reuters AD VP0643

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