TOKYO, Apr 5 (Reuters) The euro hovered near a two-month high against the dollar and a record peak versus the yen on Wednesday, boosted by expectations the European Central Bank will raise interest rates next month and beyond.
The dollar also came under pressure after Kansas City Federal Reserve Bank President Thomas Hoenig said late on Tuesday that the central bank is very close to where it needs to be on policy after having raised rates 15 straight times to 4.75 percent.
The contrasting outlooks for the Fed to soon end its long credit tightening campaign while the ECB may repeatedly raise rates in the months ahead have taken a toll on the U.S. currency.
The single currency jumped 1 percent against the dollar the previous day after a news report that the ECB will boost interest rates to 2.75 percent in May, while a separate report from a U.S.
think tank said the Federal Reserve will soon stop raising rates.
The market widely expects the ECB to keep overnight rates unchanged at its policy meeting on Thursday but lift them in May and possibly take them as high as 3.5 percent by year-end.
Traders said the market was eyeing comments ECB chief Jean-Claude Trichet is slated to make after Thursday's meeting for a clear signal of how much credit tightening is in store.
''If the ECB is poised to increase interest rates in May, Trichet is likely to say something suggesting the move,'' said Junya Tanase, currency strategist at JPMorgan Chase in Tokyo.
By 0135 GMT, the euro was little changed at $1.2260, up from a low near $1.2240 in early Asian trade and not far from a two-month high of $1.2277. The dollar shed about 0.3 percent to 117.15 yen.
Against the yen, the single currency fell to 143.65 yen, down from a high of 144.13 yen the previous day -- the single currency's strongest since it was launched in 1999.
Traders said selling by Japanese exporters helped nudge the euro lower.
Speculation about central banks diversifying their reserves out of the dollar also bolstered the single currency.
A variety of reports from China and the Middle East on central banks switching some of their reserves out of the U.S.
currency rattled investors on Tuesday and added to the dollar's woes.
The central bank of the United Arab Emirates postponed a decision about transferring 10 percent of its $23 billion of reserves to the euro from the dollar until next month.
But with the Fed widely seen lifting its funds rate for the 16th straight time to 5 percent in May, the dollar's losses have been limited. Investors are looking for clues on when the Fed will stop the long tightening campaign that began in June 2004.
Elsewhere, the Reserve Bank of Australia (RBA) held interest rates unchanged at 5.5 percent on Wednesday for a 13th straight month. But analysts say signs of growth picking up could mean the RBA raises rates down the road.
The Australian dollar rose as high as $0.7233 in early Asian trade, partly on the back of Japanese buying of higher-yielding currencies.
REUTERS SHR VP0745