Dollar steady post-Fed, yen rises after Paulson

LONDON, Feb 1 (Reuters) The dollar held tight ranges against the euro on Thursday after the Federal Reserve maintained a warning on inflation risks, while the yen hit a one-week high versus the dollar after comments from U.S.

Treasury Secretary Henry Paulson.

After leaving interest rates on hold as expected, the U.S.

central bank said inflation pressures were likely to moderate over time and monetary tightening may be needed depending on the inflation and economic outlook.

''There was a view that the market had got ahead of itself.

The Fed was injecting a dose of realism to rein in the more optimistic expectations,'' said Jeremy Stretch, strategist at Rabobank.

Paulson said on Wednesday he was watching the value of the yen ''very, very carefully,'' intensifying wariness that the Group of Seven financial chiefs might discuss the yen's weakness at their meeting in Germany next week.

At 0940 GMT the dollar was trading at 120.56 yen, slightly down on the day and moving further away from a four-year high around 122.20 hit on Monday.

The yen rose a quarter percent to 156.92 yen per euro after triggering stop-loss buying orders at 157.00.

Japan's low interest rates -- 0.25 percent compared with 5.25 percent in the United States and 3.5 percent in the euro zone -- have encouraged yield-hungry investors to borrow in yen to invest in currencies with higher interest rates.

Paulson's comments follow a chorus of complaints about yen weakness this week from European policymakers.

Remarks from both the euro zone and the United States fanned speculation the G7 might discuss the yen's weakness.

''The Fed's statement is affecting the dollar but pre-G7 caution is also weighing more because market players need to make adjustments having built up positions on the assumption that the yen's weakness will continue,'' said Nobuo Ibaraki, a foreign exchange manager at Nomura Trust and Banking in Tokyo.

FED REACTION Tokyo traders said the dollar has been sold after the Fed statement as some investors had expected more hawkish comments on inflation after recent solid economic data, including above-forecast fourth-quarter growth data on Wednesday.

Investors are focusing on the Institute of Supply Management's January manufacturing survey due later in the session and monthly non-farm payrolls numbers on Friday.

The data could solidify the view that the world's largest economy has bounced back from a slowdown.

The ISM index was expected to rise to 51.9 from 51.4 in December.

The equivalent euro zone manufacturing survey showed the region's overall factory growth unexpectedly slowed to its weakest in 11 months, although manufacturers raised prices at their fastest pace in at least 4 years.

REUTERS CS DS1643