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TOKYO, Aug 16 (Reuters) The dollar slipped against the yen on Wednesday, extending losses made after softer U.S. producer prices suggested the Federal Reserve may not need to raise interest rates further to combat inflation.

The U.S. currency fell sharply in the previous session on news the core producer price index slipped 0.3 percent in July, declining for the first time since October and well below the rise expected by economists.

''The market wasn't positioned for that sort of figure,'' said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo.

''Figures are having a much bigger impact in the market at the moment because we don't have any defined direction.'' Adding to the dollar's woes, a separate survey on Tuesday from the New York Federal Reserve showed manufacturing activity in August slowed to its weakest since June 2005.

Federal funds futures on Tuesday implied that the market was seeing a 36 percent chance the Fed will raise rates again at its next meeting in September, down from a 42 percent chance just before the data releases.

For a clearer picture of the outlook for U.S. rates, the market has turned its attention to the report on consumer price inflation in July due at 1230 GMT.

The core consumer price index likely climbed 0.3 percent in July from a month earlier, matching June's rise, according to the median forecast in a Reuters poll of economists.

In early Tokyo trade the dollar dipped to 115.95 yen from around 116.10 yen in late U.S. trade on Tuesday when it fell 0.5 percent.

Redemptions of coupon payments in U.S. Treasuries were also seen supporting the yen as Japanese investors were expected to repatriate their windfalls into yen from dollars.

The euro was little changed at $1.after climbing 0.5 percent in the previous session.

The single European currency slipped to 148.25 yen from around 148.50 yen but stayed in sight of the record high of 148.62 yen touched on electronic trading platform EBS on Tuesday.

The yen has repeatedly plumbed new lows against the euro amid signs the Bank of Japan is in no hurry to raise rates again after the first rise in six years last month, while the European Central Bank is expected to keep tightening credit.

The Fed left rates on hold at 5.25 percent last week after raising them 17 straight times since June 2004, though it kept the door open for more credit tightening if price pressures persist.

REUTERS PDS PM0721