Array

TOKYO, Oct 31 (Reuters) The yen slipped further from a one-month high against the dollar on Tuesday after weak economic data in Japan cast some doubt on whether the Bank of Japan would be able to raise interest rates again this year.

Investors are awaiting the BOJ's semiannual report on the economic outlook at 0600 GMT, which is expected to underscore the central bank's upbeat view of Japan's recovery and help lay the groundwork for future rate increases.

BOJ officials have repeatedly said they will raise rates gradually but they are looking at the economy's broad performance in assessing policy and not just focusing on the pace of rise in core consumer prices.

As widely expected, the BOJ kept overnight rates unchanged at 0.25 percent in a unanimous vote after a one-day policy meeting.

BOJ Governor Toshihiko Fukui is scheduled to give a news conference starting at 0645 GMT after appearing in parliament around 0600 GMT.

Masafumi Yamamoto, a currency strategist at Nikko Citigroup, said the BOJ is likely to downgrade its growth forecasts for the current fiscal year and its consumer price forecasts for both this year and the 2007/08 business year.

''If you look at these figures, it's not a strong environment for the BOJ to hike interest rates before the end of this year,'' he said.

With the BOJ raising rates cautiously, the low-yielding yen has fallen out of favour with many investors. Market players have also borrowed yen and used the funds to buy higher-yielding currencies in the carry trade.

The dollar was little changed near 117.50 yen after having climbed as high as 117.72 yen pulling away from the one-month low of 117.13 yen struck on Friday after a report showing surprisingly tepid U.S. growth in the third quarter.

The dollar recovered on Monday after data showing solid personal income and spending suggested the Federal Reserve will keep interest rates steady at 5.25 percent for a while, even as markets still look for the Fed's next move to be a cut in 2007.

The euro was flat near 149.45 yen in sight of the 150.80 yen struck on Friday on electronic trading platform EBS, the strongest since the single currency was launched in 1999.

But the euro dipped to $1.2715 from $1.2725, while the pound fell to $1.8995 after climbing to a one-month peak of $1.9043 the previous day.

The hunger for yields among investors has driven the Australian dollar to two-month highs as the Reserve Bank of Australia is expect to lift rates again this year to 6.25 percent.

The Aussie changed hands near $0.7690 after reaching $0.7703 on Monday, its highest since early September.

Q3 NOT SO PRETTY Tuesday's data showed Japan's unemployment rate ticked up to 4.2 percent in September from 4.1 percent the prior month.

Household spending plunged 6.0 percent in September from a year earlier, much worse than expected and down for a ninth straight month.

Economists said the data may mean that Japan's gross domestic product contracted in the third quarter and make it difficult for a rate increase this year.

Most market players believe the BOJ will raise rates to 0.5 percent in the first quarter of 2007, while a minority still see a chance for a move in December.

''If GDP comes in negative, the BOJ will probably be on hold, at least until next year,'' said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo.

The yen has suffered even as the central banks of Switzerland, Russia and the United Arab Emirates have indicated in the past two weeks interest in shifting some foreign reserves into the yen, or have already done so.

Yamamoto at Nikko Citigroup said the reserves of Switzerland and the UAE were relatively small and any yen buying would not offset Japan's low interest rates and the steady demand for higher-yielding foreign assets by Japanese investors.

REUTERS AB KP1105