LONDON, Feb 21 The yen fell broadly on Wednesday, inching closer to a record low against

LONDON, Feb 21 (Reuters) The yen fell broadly on Wednesday, inching closer to a record low against the euro after the Bank of Japan said it would raise interest rates gradually after lifting them to a decade high of 0.5 percent. The yen quickly wiped initial gains made just before the rate hike announcement as BOJ Governor Toshihiko Fukui cautioned on future increases, saying the central bank would raise rates slowly and rises in consumption will only be modest.

Investors doubt the BOJ could move again anytime soon especially with core inflation still barely rising.

''(The initial yen rise) was short-lived. That is a reflection of the fact Japan's rates are still very low and they are not going to catch up with what's going on with the rest of the world,'' said Tom Levinson, currency strategist at ING.

''Comments from BOJ suggest that they are tightening rates over the next few years but they rule out another rate hike in the near term. The market had hoped for more bullish comments.'' By 0910 GMT, the dollar had risen 0.5 percent to 120.63 yen , this week's high.

The euro climbed as high as 158.73, closing in on a record high of 159.00 set last week after Group of Seven financial chiefs made no explicit mention of the yen's weakness. The euro was up 0.1 percent at $1.3150 ahead of key U.S. inflation data for January and the minutes of the Federal Reserve's latest meeting.

BUSINESS AS USUAL Japan's ultra-low rates have spurred market players to use the yen as a source of cheap funds to buy higher-yielding currencies in the carry trade and have prompted many domestic investors to seek better returns in foreign assets.

Other industrialised countries are set to raise interest rates further, boosting the appeal of carry trades.

Earlier on Wednesday, Reserve Bank of Australia governor Glenn Stevens said rates were more likely to rise than fall in the months ahead.

His comments boosted the Australian dollar to one-month highs versus the yen and the U.S. dollar.

The European Central Bank is also set to raise rates, in March, while the outlook for U.S. interest rates is less certain with some expecting a cut this year.

Investors are eyeing the U.S. January inflation report due at 1330 GMT for clues on the path of interest rates.

''Should we see core CPI come in below expectations of 0.2 percent ... this would be seen to underline the (Fed chairman Ben) Bernanke goldilocks scenario which would point towards the assumption that we are likely to see U.S. 10-year yields continue their move lower, with the dollar suffering as a consequence,'' Rabobank said in a note to clients.

Federal Reserve officials Donald Kohn and Janet Yellen are set to speak later at separate events.

REUTERS CS ND1544