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Tokyo, Jul 12: The dollar edged up against the euro and the yen on Wednesday but stayed in sight of one-month lows ahead of data later in the day that could show a widening in the U.S. trade deficit.

The market was also counting down to the Bank of Japan's two-day policy meeting that ends on Friday, which most dealers expect will result in the first interest rate rise in six years as the country recovers from a near decade-long bout of deflation.

The dollar slipped on Tuesday as market players trimmed long positions before the U.S. trade figures land at 1230 GMT, and some said this could continue as traders try to avoid getting stuck with the currency if the data disappoints.

''A lot of people are wary of keeping long dollar positions before the trade data because a weak reading could lead to selling,'' said Takehiko Jimbo, forex manager at Mitsubishi UFJ Trust and Banking.

A Reuters poll showed that the trade deficit likely swelled to $64.9 billion in May from $63.4 billion in April as higher oil prices helped to pump up the bill for imports.

Although the dollar's interest rate advantage has helped to support the currency since the end of 2004, an expanding deficit could draw attention back to the huge U.S. trade shortfall, which economists say is helping to fuel global imbalances.

Many analysts say the solution lies in a weaker dollar, in part to make U.S. exports more competitive in global markets.

By 0225 GMT, the euro inched down to $1.2760 from around $1.2775 in late New York trade, but was just a cent away from a one-month high of $1.2865 touched last week.

The dollar crept up to 114.40 yen from 114.25 yen. It slipped to 113.45 yen on trading platform EBS at the start of the week, the lowest level in a month.

The euro was at 145.95 yen, well off the record high of 147.42 yen hit last week.

The bombing of a commuter train in India's financial centre of Mumbai on Tuesday that killed more than 160 people had limited impact on the currency market.

The partially convertible rupee hovered around 46.15 per dollar little changed from late Tuesday levels.

BOJ IN FOCUS

In addition to the U.S. trade data, many in the market were anticipating the outcome of the BOJ's policy meeting.

A Reuters poll on Tuesday showed that 21 out of 22 traders and analysts in Japan's interest rate markets expect the central bank to raise rates on Friday by 25 basis points from zero percent currently.

Given high expectations that rates will rise, traders said the risk was that the yen could trip should the BOJ refrain from lifting on Friday.

''A 25 basis point rate rise is more or less a done deal, so if the BOJ skips this month, it could trigger some selling in the yen,'' said Mitsuru Sahara, senior vice president of forex trading at Mitsubishi UFJ Bank.

At the same time, by bumping up rates by such a degree the BOJ will do little to cut the rate advantage held by the yen's major rivals.

At 5.25 percent, the U.S. rate will continue to dwarf Japanese rates, while the European Central Bank is widely expected to boost to 3 percent next month.

Due to such heavy expectations for a rate rise, traders were focusing on the official discount rate. The same Reuters poll showed that most respondents expect the BOJ to lift the rate to 0.50 percent from 0.10 percent at the moment.

The rate, also known as the Lombard lending rate, determines overnight repo rates, which in turn offer clues into appropriate yields on treasury and financing bills.

''The forex market is anticipating a rate of 0.4-0.5 percent,'' said Sahara at Mitsubishi UFJ.

''I doubt that a slightly lower level, like 0.35 percent, will induce significant yen selling, but a level above 0.5 percent could lead to some buying.''

REUTERS