TOKYO, Feb 23 The dollar hovered near a four-year high against the yen on Friday and the

TOKYO, Feb 23 (Reuters) The dollar hovered near a four-year high against the yen on Friday and the euro struck an all-timepeak as the Japanese currency's slide extended after the Bank of Japan emphasised this week it would be slow in raising interest rates.

The BOJ's rate increase to a decade-high of 0.5 percent on Wednesday did nothing to stem the yen's broad slide against major currencies due to Japan's still extremely low rates, a vestige of the central bank's efforts to drag the economy out of deflation.

Expectations that tepid inflation will keep the BOJ on hold for about six months have spurred investors to use the low-yielding yen as a cheap source of funds to buy higher-yielding currencies and assets in the carry trade.

Analysts also believe higher short-term rates in Japan will do nothing to slow the heavy buying of foreign bonds and stocks by Japanese investors, particularly households, seeking better returns abroad.

''There is a lot of hype about 'carry trades', but the real issue, in my view, is capital outflows,'' said Stephen Jen, chief currency economist at Morgan Stanley, in a note to clients.

''There is a lot of retail demand in Japan for foreign bonds and equities.'' The dollar was steady near 121.50 yen after climbing as high as 121.64 yen in New York trade, back near the peak of 122.20 yen struck in January -- the highest since December 2002.

The euro edged up to a new lifetime high of 159.63 yen before pulling back to 159.43 yen, with traders saying it was only a matter of time before the single currency overtakes the 160 yen level.

Even the Swiss franc, the other low-yielding major currency that has been used to fund carry trades, hit an eight-year high of 98.20 yen in early trade.

The euro was little changed against the dollar near $1.3123 holding below the six-week high of $1.3190 struck earlier in the week.

The euro has strengthened as the European Central Bank is widely seen lifting rates to 3.75 percent next month from the current 3.5 percent and likely to 4 percent by the end of the year.

But the dollar has struggled against other major currencies as market players look for the Federal Reserve to start trimming rates from 5.25 percent later in the year.

Some of those rate cut expectations were tempered this week by comments from Fed officials saying they were still worried about a pick-up in inflation and data showing a surprising big rise in core consumer prices last month.

The outlook for short-term interest rates remains the dominating factor driving currencies as investors shift funds to those with high yields or rising yields.

REUTERS PDS RN0719