LONDON, Feb 23 The yen hit a historic trough against the euro on Friday and held near a r

LONDON, Feb 23 (Reuters) The yen hit a historic trough against the euro on Friday and held near a recent four-year low versus the dollar after Bank of Japan Governor Toshihiko Fukui repeated that future interest rate hikes will be a slow process.

The euro was poised for its biggest weekly gain versus the yen since September 2005 as a larger-than-expected fall in the key Ifo German business sentiment survey for February did nothing to change expectations of a euro zone interest rate rise in March.

The BOJ raised rates to a decade-high of 0.5 percent on Wednesday but has signalled it would tighten policy further only gradually.

With inflation barely rising, the BOJ is set to keep rates on hold for about six months, prompting yield-hungry investors to pile their yen-financed carry trades back on.

''In an environment where carry trades continue, the yen remains weak. The BOJ has been good in maintaining a dovish rhetoric, signalling rates are rising slowly. There is no inflation scare in Japan and no aggressive expectations for tightening,'' said Steven Saywell, currency strategist at Citigroup.

Benedikt Germanier, currency strategist at UBS, said: ''The Ifo remains at a strong level. The ECB has a clear reason to hike. March is a done deal, (expectations for) June are hardly changed. I still want to buy euros on dips.'' The euro had risen as high as 159.63 yen before trimming gains to 159.30 by 0915 GMT. It was down 0.1 percent at $1.3111 , having hit a six-week high around $1.3190 earlier in the week.

The dollar was steady at 121.43 yen, near the four-year peak around 122.20 yen set in January.

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 high-yielding Australian and New Zealand dollars were up about 2 percent on the week against the Japanese currency, taking the kiwi to a 14-month high on Thursday.

The European Central Bank is expected to raise rates to 3.75 percent next month and perhaps to 4 percent by the end of the year.

JAPAN CAPITAL FLIGHT Analysts 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.

Instead, the recovering economy, rising stock markets and improving consumer confidence are boosting risk appetite of Japanese investors who are keen to chance higher yields overseas. Tokyo's Nikkei stock average rose to a seven-year closing high on Friday.

The dollar has struggled against other major currencies as investors look for the Fed to cut rates from 5.25 percent later in the year.

Investors are eyeing speeches from Federal Reserve officials later on Friday including Richard Fisher and Janet Yellen for clues as to whether Fed officials are worried about inflation enough to hold off cutting rates.

HBOS Treasury Services said rising oil prices, which hit a seven-week high on Thursday above $61 a barrel, were also weighing on the dollar.

''A rising oil price is dollar negative as the ECB is more likely than the U.S. Federal Reserve to raise rates when faced by an oil-driven rise in headline inflation. It transfers portfolio holdings of dollars to the more aggressive diversifiers among reserve managers and impacts negatively on the U.S. trade position,'' the bank said in a note to clients.

REUTERS CS PM1618