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TOKYO, Apr 17 (Reuters) The dollar fell in thin Easter holiday trade on Monday as worries that the Federal Reserve will soon pause its rate-tightening campaign prompted dollar selling by dealers.

Traders said sentiment for the dollar was dampened by an article in the Wall Street Journal saying Fed officials are not convinced they need to keep raising interest rates beyond an expected move in May.

Greg Ip, the WSJ's Fed correspondent who is seen as sometimes reflecting the central bank's thinking, said that while markets are expecting the Fed to raise rates in May and beyond, Fed officials ''are not convinced that much action will be needed''.

Ip cited comments from speeches last week by Fed Governors Donald Kohn and Susan Bies as suggesting that the moment for a pause is approaching.

Kohn said on Thursday the Fed was aware it risks overshooting on monetary policy tightening, given the delay between its rate hikes and their impact on the economy.

Bies also said on Thursday the Fed is getting closer to calling a halt to its string of interest rate rises.

''Ip's report made some dealers nervous,'' said Mitsuru Sahara, a senior trader at Bank of Tokyo-Mitsubishi UFJ. ''The market is turning more sensitive to any risks that could push the dollar down.'' Dealers were afraid of being caught with dollar long positions ahead of this week's potentially market-moving events, including Chinese President Hu Jintao's first formal visit to the United States, Sahara said.

Traders said investors were also reluctant to buy the dollar ahead of the March producer price index on Tuesday and March consumer price index on Wednesday, which may provide clues to how much further the Fed will boost interest rates.

The Fed has lifted rates 15 straight times to 4.75 percent and is widely expected to bump rates up to 5 percent at its next policy meeting in May.

The U.S. central bank's steady rate tightening helped the dollar rise 15 percent against the yen and the euro last year.

The dollar slipped to 118.05 yen from around 118.70 in Tokyo trade on Friday, while the euro rose to around $1.1295 from near $1.2110.

Dealers said moves were exacerbated by thin trading, with many financial centres closed for Easter holidays.

Markets in the United States were closed on Friday but reopen on Monday, while markets in Britain and elsewhere will remain closed.

The market will also eye February U.S. capital flows data at 1300 GMT to see whether the United States are attracting enough foreign capital to fund its trade gap.

Economists expect $62.8 billion in net capital inflows, down from $66.0 billion in net inflows in January.

The U.S. trade deficit narrowed to $65.7 billion in February from $68.6 billion a month earlier.

REUTERS CS ND0926

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