Dollar slips vs yen ahead of central bank meetings

NEW YORK (Reuters) - The dollar rallied against the euro on Tuesday in technically driven trade but fell versus the yen as investors awaited hints from the Federal Reserve that it may lower U.S. interest rates by year-end.

Traders also sold the euro against the yen, knocking it from near last week's record high of 163.60 yen EURJPY=EBS, according to electroninc trading platform EBS.

The euro's slide against the dollar on Tuesday was mostly a technical affair, with traders taking profits after the currency fell in five of the seven sessions since touching a record high above $1.3680.

The downward pressure triggered some automatic orders to sell euros that pushed it to $1.3516 EUR=, according to Reuters data, a three-week low, before it edged back to

$1.3540.

But analysts said the dollar still looks vulnerable in the weeks ahead, especially given recent data suggesting the U.S. economy is slowing while euro-zone growth steams ahead.

"The dollar is just coming up for air, having a short-term respite," said David Mozina, foreign exchange strategist at Lehman Brothers in New York. "The growth and inflation mix in the euro zone is far better than in the United States."

Central bank policy meetings in the United States, the euro zone and Britain this week are expected to reinforce that view.

While the Federal Reserve is seen holding rates at 5.25 percent after its meeting on Wednesday, analysts say officials may express concern about signs of slower U.S. growth.

The median estimate of economists polled by Reuters put the benchmark federal funds rate at 5 percent by year-end.

The Bank of England, meanwhile, is expected to lift rates to 5.5 percent -- the highest level in the Group of Seven wealthiest countries -- while the European Central Bank is seen signaling it will raise interest rates in June.

The dollar slipped 0.1 percent to 119.93 yen JPY= while the euro was off 0.6 percent at 162.39 yen.

Analysts said part of the yen's rise was tied to speculative positioning and risk reduction ahead of the central bank meetings that also weighed on U.S. stock prices.

"There is some caution going into the central bank meetings," said Carl Forcheski, vice president, corporate foreign exchange at Societe Generale in New York.

Traders said euro weakness was also partly tied to comments from German Finance Minister Peer Steinbrueck, who said the yen was on "a sustainable recovery course."

Some European officials have complained about yen weakness for fear it will undermine European exports and production.

A Tuesday report showing German industrial production unexpectedly fell in March and was revised lower in February also weighed on the euro.

"People came in today and see that the euro made eight attempts to set a new lifetime high before stalling, and that's prompted them to look at the next 48 hours as an opportunity (to sell euros)," said Tim Mazanec, strategist at Investors Bank & Trust in Boston.

"But if you get the Fed sounding dovish and the ECB hawkish on rates, you can forget about this move," he said.

Elsewhere on Tuesday, the Australian dollar rose 0.4 percent to US$0.8282 AUD= as strong consumer spending data kept upward pressure on inflation and interest rates.