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TOKYO, Sep 21 (Reuters) The dollar edged down on Thursday after the Federal Reserve left interest rates on hold for the second straight policy meeting and suggesed inflation risks were moderating.

As widely expected, the Fed voted to keep its overnight funds rate at 5.25 percent, the level reached in June after increases for 17 straight meetings stretching over more than two years.

In a statement outlining its action, the Fed said there were a number of reasons to expect inflationary pressures to ''moderate over time'' but it made clear this was a forecast and not yet reality, holding out the possibility of higher rates if needed.

''Again we're back to following every set of US economic data that comes out for any sign of inflation,'' said the chief trader at a European investment bank in Tokyo.

Moves in the Fed fund futures markets pointed to just a 6 percent chance of a quarter percentage point rise at the U.S.

central bank's next meeting in October.

By contrast, European Central Bank officials have kept up their talk of being vigilant in tightening credit enough to keep inflation pressures contained.

The key rate in the euro zone is at 3 percent and expected to climb as high as 4 percent next year, while the Bank of Japan is not seen raising rates from 0.25 percent anytime soon.

For clues about the outlook for Japanese rates, the market is keen to hear what BOJ Governor Toshihiko Fukui has to say in a speech later in the day.

''Watch for BOJ Governor Fukui's speech for references to the debate on the sidelines of the G7 meetings about the weakness of the yen or any hint regarding BOJ hikes this year,'' JPMorgan Chase wrote in a note to clients.

Comments by Japan's finance minister and European officials after the meeting of the Group of Seven powers last weekend seemed to back a strong yen by saying the currency should reflect Japan's solid economic recovery.

In early Tokyo trade, the dollar dipped to 117.35 yen from 117.45 yen in late U.S. trade.

The euro inched up to $1.2695 having hit a session high around $1.2730 following the Fed statement.

The single currency was little changed at 148.95 yen The yen was unfazed by data showing Japan's trade surplus came in at 200.5 billion yen ($1.71 billion) in August, less than half market expectations.

The New Zealand dollar was at $0.6590 down from the day's high of $0.6645 after the country posted a wider than expected current account deficit for the second quarter.

REUTERS DKS BST0625