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Written by: Staff

TOKYO, May 16 (Reuters) The dollar extended gains against the yen on Tuesday, drifting further away from an eight-month low as investors took profits on the U.S. currency's sharp fall in the past month.

The dollar rebounded the previous day to mark its largest one-day gain in a month against the euro, taking a cue from the biggest fall in gold prices in over six years.

But traders said few in the market believe the dollar's downward trend has reversed given expectations that the Federal Reserve will soon end its two-year run of interest rate tightening.

The Fed has lifted its funds rates at all 16 of its policy meetings since June 2004, helping the dollar to rise around 15 percent against the euro and the yen last year.

Speculation that Washington may allow the dollar to depreciate further to help reduce the huge U.S. trade deficit has also caused investors to hesitate chasing the currency higher, traders said.

''Sentiment for the dollar is clearly bearish,'' said Nobuo Ibaraki, forex manager at Nomura Trust and Banking.

Traders said the market would pay close attention to the April producer price index due at 1230 GMT for clues about the Fed's next move.

Economist forecast a median 0.8 percent rise compared with a 0.5 percent raise in March.

In early Asian trade, the dollar was buying 110.65 yen, up from around 110.50 yen in late U.S. trade on Monday and well above an eight-month low of 109.31 yen hit late last week.

The euro was little changed at $1.2795.


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