TOKYO, Jan 31 The dollar held near a four-year peak against the yen on Wednesday as inves

TOKYO, Jan 31 (Reuters) The dollar held near a four-year peak against the yen on Wednesday as investors waited for a Federal Reserve policy statement due later in the session for clues about the course of U.S. interest rates.

The U.S. central bank is widely expected to keep interest rates unchanged at 5.25 percent when it concludes its two-day meeting later this session, and traders were focusing on whether the Fed has become more optimistic on the economy.

Recent solid data has helped cool speculation the Fed may cut interest rates this year, with traders looking ahead to coming indicators for more signs of strength in the U.S. economy.

''Market sentiment about the economy and the interest rate outlook has changed, and it is now trying to push the dollar higher from current levels,'' said a dealer at an European bank.

Data due later in the session includes fourth-quarter gross domestic product and the employment cost index. Economists expect GDP to show annualised growth of 3.0 percent in the fourth quarter, up from 2.0 percent in the third quarter.

Growth data will be followed by manufacturing activity figures on Thursday and key jobs data on Friday.

Traders said the dollar's support looks firm but its rise may be slowed as investors become more cautious ahead of a meeting of the Group of Seven industrialised nations.

The U.S. currency was trading at 121.66 little changed from late U.S. trade and near the 122.20 yen hit on Monday, its strongest since December 2002.

The euro was at 157.69 yen compared with 157.74 yen in late U.S.

trade and not far from a record high of 158.62 yen struck last week.

The single European currency was at $1.2960.

The yen remains under pressure as generally soft data this week reinforced doubts about the likelihood of the Bank of Japan's raising interest rates next month.

Traders said concerns expressed by European policy-makers about the yen's weakness were generally seen as mere verbal intervention to slow the pace of the euro's climb.

In an interview with the Nikkei newspaper published in Japanese on Wednesday, Bank of France Governor and ECB Governing Council member Christian Noyer said a weak yen would create strains in the global economy in the medium term, but added that the market was likely to correct itself.

Asked how rises in the euro would affect exports, Noyer was quoted as saying that exports were not the main reason for euro zone growth, adding that the overall contribution of exports to growth was limited and that the engine of growth was domestic demand in the region.

''It seems to be that European complaints about yen weakness is just a way to slow the pace of the euro's rise because the market consensus right now is there is every reason to sell the yen,'' the European bank dealer said.

German Finance Minister Peer Steinbrueck said on Tuesday that the yen's weakness against the euro would be discussed at the G7 meeting on Feb. 9-10 in Essen, Germany.

European finance ministers have voiced worries about the yen's broad weakness but traders remained sceptical whether the G7 would take any action other than repeating their concerns.

Upbeat euro-zone growth prospects will likely keep the European Central Bank on course of raising interest rates and higher yields will maintain the euro's appeal over the yen.

''What is more important is whether the United States will side with Europe in voicing concerns about the yen's broad weakness,'' said Kaoru Kondo, chief analyst at Fisco.

He said while Japan is unlikely to be mentioned, caution might be needed for U.S. Treasury Secretary Henry Paulson's appearance before Senate Banking Committee later in the session.

Paulson will testify on the Treasury's recent foreign exchange report and its strategic economic talks with China.

REUTERS SY ND0940