Dollar hits 3-mth high vs yen on Fed outlook

TOKYO, May 23 (Reuters) The dollar hit a three-month high against the yen and hovered around its strongest against the euro in six weeks on Wednesday, supported by receding expectations for the Federal Reserve to cut interest rates later this year.

Comments by Richmond Federal Reserve Bank President Jeffrey Lacker on Tuesday backed the market view that the central bank is not in a hurry to lower its funds rate from 5.25 percent.

Lacker, seen as one of the Fed's more hawkish officials but not on the policy-setting board this year, said he was comfortable with the rate at the current level, but suggested that this view would have to be re-evaluated later this year.

Analysts said investors realised they had become too pessimistic about the U.S. economy after solid data last week cooled expectations for a Fed rate cut this year.

Speculation of lower rates has pummelled the dollar for much of the year, driving it to a record low versus the euro late last month as short positions in the U.S. currency accumulated.

''Because of a correction in that view, participants are being forced to liquidate short dollar positions,'' said Toru Umemoto, chief forex strategist at Barclays Capital in Tokyo.

Dealers awaited more U.S. economic data, including durable goods orders and new home sales on Thursday and existing home sales on Friday that could give more clues on the future path of the Fed's monetary policy.

The dollar traded at 121.65 after climbing to 121.73 yen on electronic trading platform EBS on Wednesday, its highest since Feb. 13.

Market participants are now focusing on whether it will climb beyond 122.20 yen, this year's peak struck in late January and the highest since December 2002.

The euro barely budged against the dollar, trading at $1.3455 It fell to a six-week trough of $1.3436 on EBS on Monday.

Against the yen, the single European currency was up 0.2 percent at 163.75 yen remaining within striking distance of a record peak of 163.94 yen hit on Monday.

Strong figures in the ZEW survey of German investor confidence, which reinforced expectations that the European Central Bank will raise interest rates to 4 percent from the current 3.75 percent in June, failed to boost the euro on Tuesday as speculators kept reducing long euro positions.

Such positions -- bets that the euro will rise -- have hit a record high this month, raising concerns of a sudden correction and making market players cautious about buying the euro aggressively for now.

But analysts said investors believe the euro will remain supported on the view that euro zone rates will keep rising, and that any downward correction in the currency will be limited.

''The market knows how strong the euro zone economy is and continues to expect an ECB rate hike in June,'' said Masaki Fukui, a senior market economist at Mizuho Corporate Bank. ''The market is likely to turn bullish on the euro again,'' Fukui said.

U.S.-CHINA TALKS CONTIUNE Traders were watching for any comments from the United States and China as a two-day meeting between Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi concludes in Washington on Wednesday.

A senior Bush administration official said on Tuesday that U.S. and Chinese officials had a ''direct exchange of views'' on the valuation of the yuan currency, with the U.S. side saying China still needed to allow the yuan to appreciate more rapidly.

The United States argues that an undervalued yuan gives China an unfair advantage in international trade and is a key driver of its trade deficit.

Last week, China's central bank widened the yuan's daily trading band against the dollar to 0.5 percent from 0.3 percent.

The market has been showing a calm reaction to the U.S.-China talks so far, as investors do not expect China to yield further on the currency policy issue than last week's step.

REUTERS SBA VV1145