Array

TOKYO, Aug 2 (Reuters) The dollar fell to a one-month low against a basket of major currencies on Wednesday as investors lean towards the Federal Reserve pausing its two-year string of interest rate rises at a meeting next week.

Data showing robust manufacturing growth and a rise in the Fed's favoured inflation gauge to a four-year high did little to shake mounting expectations that the Fed will hold rates steady at 5.25 percent at next Tuesday's gathering.

Any Fed pause would come just as the European Central Bank is widely expected to raise rates to 3 percent on Thursday and after the Reserve Bank of Australia lifted rates to 6 percent on Wednesday.

Investors are now looking ahead to Friday's U.S. jobs data to help clarify whether the Fed may pull the trigger for an 18th straight time next week and raise rates. U.S. interest rate futures show just a 38 percent chance of another Fed move.

''There are still some events lying ahead ... Things have not been settled yet in terms of the outlook for interest rates,'' said Tomoko Fujii, a senior economist and strategist at Bank of America.

A trade-weighted index that tracks the dollar's performance against six other major currencies fell to 84.91, its weakest since July 7.

Dealers in Tokyo said they were puzzled by the dollar's decline after the solid U.S. data.

''The dollar was bought after the strong data led people to think the Fed might raise rates on Aug. 8 after all,'' said a dealer at a major Japanese bank. ''No one has a clear explanation for why the yen has been rising (against the dollar) after that.'' The yen received some support from comments by Bank of Japan Policy Board member Atsushi Mizuno, who said on Wednesday it would be a mistake to think there would be no additional rate rises this year.

The comments by Mizuno, regarded as one of the more hawkish members of the BOJ policy board, were in line with comments by other BOJ officials over the past week.

''The currency market's focus is now squarely on U.S. interest rates, so even with regards to dollar/yen, comments by BOJ officials don't really seem to trigger yen buying,'' says Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp.

The dollar slipped 0.25 percent to 114.30 yen as of 0406 GMT, after falling as low as 114.21 yen on electronic trading platform EBS, a whisker above a three-week low of 114.19 yen hit on Monday.

Other factors hurting the dollar were possible speculative selling aimed at triggering stop-loss orders near 114.20 yen, as well as talk of selling by Japanese investors, traders said. But Japanese importers were expected to buy dollars near 114 yen.

The euro was little changed at $1.2825 after hitting a one-month high of $1.2833. But the single European currency dipped 0.2 percent against the yen to 146.65 yen.

Sterling edged up to $1.8775 after hitting a two-month high of $1.8789 ahead of a two-day Bank of England policy meeting that starts on Wednesday.

Solid British housing market data released on Tuesday kept alive some hopes for a British rate rise this week, although only seven out of 46 economists polled by Reuters last week expected the central bank to nudge rates up to 4.75 percent on Thursday.

The Australian dollar strengthened after the Reserve Bank of Australia (RBA) raised interest rates as expected, while data showing a hefty retail sales rise in June stoked expectations for another tightening to 6.25 percent by the year-end.

The Aussie rose as high as $0.7684 -- a touch short of a two- and-a-half month high of $0.7685 hit on Friday -- after the RBA raised its cash rate by 25 basis points to 6 percent. The Aussie also hit a 4-1/2-year high against the New Zealand dollar.

REUTERS AD SSC1140