Yen matches 3-month low on soft machinery data

TOKYO, May 15 (Reuters) The yen matched last week's three-month low against the dollar on Tuesday on surprisingly weak machinery orders data that underscored market expectations for the Bank of Japan to raise interest rates only gradually.

Japan's core machinery orders fell 4.5 percent in March from the previous month, well short of market expectations for a 1.3 percent rise and raising doubts about the strength of capital spending that has helped underpin growth in the past year.

''The Bank of Japan will probably raise interest rates about two more times this fiscal year at the most. If that's the case, why not sell the yen,'' said Yuji Matsuura, a joint general manager at Aozora Bank's foreign exchange and derivatives trading group.

Many investors expect solid Japanese first-quarter growth data on Thursday to confirm the economy's steady expansion and keep the BOJ on track to raise interest rates to 0.75 percent from 0.50 percent in the July-September quarter.

But Japan's still very low yields have prompted domestic investors to shift more funds into foreign assets and prompted a wide array of markey players to use the yen to fund purchases of higher-yielding currencies and assets in the carry trade.

The dollar rose as high as 120.54 yen on electronic trading platform EBS, matching a level hit last Thursday that was the highest since Feb. 27.

But the dollar later trimmed its gains due to selling by Japanese investors and exporters and slipped back to 120.37 yen little changed from late U.S. trading on Monday.

Traders said some of the investor selling was likely a repatriation of funds from some billion of maturing U.S.

Treasury bonds on Tuesday as well as billion of coupon payments the Treasury will issue later today.

Attention is shifting to U.S. consumer price data due later this session and two key events on Thursday -- Japan's first-quarter growth data and remarks by BOJ Governor Toshihiko Fukui after a two-day policy meeting.

The BOJ is widely expected to keep rates steady at 0.50 percent this week.

The euro was steady at .3544 up from a one-month low of .3462 hit on EBS last week and near an all-time high of .3683.

The single currency was little changed at 163.03 yen hovering near a record high of 163.60 yen hit this month.

JAPAN GDP, U.S. CPI Market players said the machinery orders data by itself was unlikely to drastically alter market expectations for the BOJ to raise interest rates as early as around August.

''If you look at data in the BOJ tankan, the outlook for capital spending isn't all that bad,'' said Masafumi Yamamoto, a currency strategist for Nikko Citigroup, referring to the BOJ's quarterly business sentiment survey.

''I don't think this means that a BOJ rate rise in August has become impossible,'' Yamamoto added.

Later this session, investors will be focusing on U.S. consumer price data to gauge the chances of the Federal Reserve cutting interest rates this year.

U.S. April core consumer prices, which exclude food and energy costs, are expected to have risen 0.2 percent in April according to the median forecast in a Reuters survey.

A benign reading on core consumer prices could bolster expectations for a Fed rate cut this year and spur dollar selling, but any losses should be limited if Wall Street stocks gain on such an result, said a trader for a major Japanese bank.

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