FOREX-Yen continues to slide despite BOJ rate hike

(Recasts, updates prices)

NEW YORK, Feb 21 (Reuters) - The yen fell against the dollar and euro for a fourth session on Wednesday, after the Bank of Japan raised its key interest rate for the first time since July but said further tightening would be gradual.

That left investors still willing to fund carry trades using yen, where investors borrow in Japan where rates are low and then sell the yen to buy higher-yielding currencies. That strategy will remain appealing as long as Japanese monetary policy remains predictable and financial market volatility stays low, strategists say.

A key measure of U.S. inflation also helped the dollar. It rose at a faster rate than expected, bolstering views that U.S. interest rates aren't headed lower any time soon.

"The carry trade may still be in vogue as Japanese interest rates remain so low," said Joe Francomano, vice president for foreign exchange at Erste Bank in New York.

The euro EUR= fell 0.1 percent to $1.3124. The dollar gained 0.9 percent against the yen to trade at 121.06 yen JPY=, its highest in a week.

Euro/yen EURJPY=EBS last traded at 158.89 yen, according to electronic trading platform EBS, after climbing to a new record of 159.05 yen in the New York session.

Even with Wednesday's rate hike to 0.5 percent, the highest in a decade, Japanese interest rates remain the lowest in the industrialized world. Investors doubt the BOJ could move again soon, especially with core Japanese inflation barely rising.

BOJ Governor Toshihiko Fukui, in a news conference, said the Japanese central bank does not have specific schedules in mind for future hikes.

CPI HELPS

The dollar jumped after the U.S. Consumer Price Index for January rose more than expected despite a dip in energy prices, as medical costs jumped, a Labor Department report showed on Wednesday. For details, see [ID:nN20196451]. It pared those gains with strategists describing the reaction as "knee jerk".

"(Federal Reserve Chairman Ben) Bernanke has a dovish tone, so I'm not sure that the market is confident we would see a (rate) hike before a hold or even a cut," said Peter Rosenstreich, financial market strategist at HedgeStreet in New York.

Many investors think the United States is heading for a "Goldilocks" scenario where inflation pressures moderate while economic growth slows gently. That would probably prevent the Fed's rate-setting Federal Open Market Committee from moving rates in either direction from the current 5.25 percent.

Investor focus now shifts to the release of the minutes of the Fed's late January meeting later in the day though they are not expected to diverge much from recent policy-maker comments, including last week's Congressional testimonies by Bernanke.

Wednesday also features speeches by Fed Vice Chairman Donald Kohn at 1 p.m. (1800 GMT) and San Francisco Fed President Janet Yellen at 3:25 p.m. (2025 GMT).

In other trading, the yen fell to a one-month low against the New Zealand dollar NZDJPY=R, the highest yielder among major currencies, as the carry trade returned into focus. The kiwi also hit seven-week highs versus the greenback NZD=.