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TOKYO, Sep 13 (Reuters) The dollar held near five-month highs against the yen on Wednesday as investors kept favouring currencies offering higher yields and shrugged off data showing the U.S. deficit swelled unexpectedly to a record in July.

The yen has fallen prey as a run of weak economic data has convinced many market players the Bank of Japan will be slow in raising rates in the months ahead, keeping the unit the lowest yielding among major currencies for a while longer.

Analysts said the Japanese currency may start to stabilise ahead of the Group of Seven meeting of finance ministers in Singapore later this week, with the potential risk of any mention of currency adjustments or the yuan sparking yen gains.

The yen is often traded as a proxy for the tightly managed Chinese currency.

''Even though the yen is seen as the proxy for yuan flexibility/appreciation, we note that the correlation between yen and yuan has broken down,'' said Sue Trinh, senior currency strategist at RBC Capital Markets, in a note to clients.

The April G7 meeting surprised many in the market by explicitly naming China in calling for greater currency flexibility and appreciation to help fix global economic imbalances that unleashed a dollar sell-off and a hefty rally in the yen.

Comments from a German finance ministry official last week that the yen's broad weakness would be a topic at the G7 helped drive the Japanese currency to one-month highs against the euro.

Since then the yen has given up nearly all of those gains.

The dollar slipped in early trade to 117.85 yen from near 117.95 in late New York trade, off Tuesday's peak at 118.15 yen on electronic trading platform EBS -- the strongest since mid-April.

The euro inched down to 149.44 yen from 149.65 yen but was poised near the all-time high of 150.73 struck on EBS in late August.

The single European currency was little changed at $1.2685 close to the six-week low of $1.2647 struck earlier in the week.

Strategists at Morgan Stanley said the euro's inability to gain despite the bad U.S. deficit data and more inflation-fighting rhetoric from European Central Bank officials suggested ''there is already a lot of 'bad news' priced into the dollar.'' The dollar struck a six-week high against the Swiss franc near 1.2550 francs In the lead-up to the G7, U.S. Treasury Secretary Henry Paulson will give a speech on the international economy at 1500 GMT, with traders keeping an eye out for his comments on China and the yuan.

Chinese officials are also meeting with their European counterparts at a summit in Hamburg, Germany.

REUTERS VJ RAI0614