TOKYO, Apr 20 (Reuters) The dollar limped up on Thursday but was smarting near seven-month lows against the euro and the pound after the Federal Reserve signalled this week that a two-year campaign of raising short-term rates was nearly over.
The dollar also took a hit after the currency's long-standing troubles -- the record U.S. trade deficit -- were thrown into the spotlight by the International Monetary Fund, which said the dollar needed to fall significantly to correct global imbalances.
But Chinese President Hu Jintao helped soothe any worries about greater yuan strength or flexibility against the dollar during his trip to the United States this week, saying the yuan was not ready for a drastic change in value.
The outlook for central banks and short-term rates is still the dominant factor in currency markets, with the Fed's change of tone driving the dollar down more than 2 percent against the euro so far this week, taking losses for the year to 4.5 percent.
''Any correction in the dollar is going to be very limited,'' said Sharada Selvanathan, currency strategist at BNP Paribas in Singapore.
The minutes of the Fed's March meeting said that many central bankers felt they were nearly done tightening policy and recognised the risk of pushing rates up too far.
San Francisco Fed President Janet Yellen said in an interview with CNBC that growth was expected to slow and with inflation contained, the Fed was pretty close to taking a break.
The central bank is still widely expected to raise rates to 5 percent at its next policy meeting in May but then take a break from the string of credit tightening launched in June 2004, when the fed funds rate was at a half-century low of 1 percent.
Even a surprisingly big pickup in the March core consumer price index did little to shake expectations of a near-term Fed pause.
''The market seems unfazed by the CPI data. Sentiment has already shifted and is more positive on the euro,'' Selvanathan said.
With the European Central Bank seen raising short-term rates to 3 percent or possibly higher this year and the Bank of Japan expected to push rates up from zero sometime in the third quarter, the dollar's rate advantage is seen eroding.
In early Asian trade, the euro slipped to $1.2355, down from $1.2385 late in New York trade and a peak of $1.2395 -- the highest since last September. The pound edged down to $1.7895 from a high of $1.7937 the previous session.
Against the Japanese currency, the euro pulled back to 145.15 yen from a lifetime high of 145.44 on electronic trading platform EBS.
Compared with theoretical prices from before the euro's official launch in 1999, the single currency is at the highest against the yen since October 1998.
The broad weakness of the Japanese currency has limited the dollar's losses. The dollar changed hands at 117.45 yen, down only slightly for the year.
The yen has suffered despite Japan's solid economic expansion and emergence from deflation that has stirred expectations the BOJ will start to raise rates from zero for the first time in six years, possibly as soon as July.
On Thursday the Reuters tankan survey showed business confidence jumped in April to the highest since the survey began in June 1998. The headline diffusion index for manufacturers rose to plus 34 from plus 25 in March.
($1=117.24 yen) REUTERS CS HS0917