* Dollar/yen resistance at 103.25 -strategist
* Euro takes back lost ground after drop to 5-week low vs dollar
* Dollar index steady, close to highest level since July 2012
By Lisa Twaronite
TOKYO, May 15 (Reuters) - The dollar edged lower in early Asian trade on Wednesday but stayed close to its highest point against the yen in four and a half years on signs of an improving U.S. economy and rising Treasury yields.
The dollar index was steady at 83.589, after retracing its overnight high of 83.687, which was its loftiest level since July 2012.
The dollar bought 102.24 yen, down about 0.1 percent but still not far from 102.42 yen on Tuesday on the EBS trading platform.
"Initially the dollar/yen rally had appeared to stall but once Treasury yields turned positive, dollar/yen broke above 102 to hit an intraday high," said Kathy Lien, managing director at BK Asset Management in New York.
With U.S. 10-year yields approaching 2 percent, Japanese investors will realize that they offer an opportunity for yield and capital appreciation as the Bank of Japan's policies weaken the yen even as the U.S. Federal Reserve prepares to remove its stimulus, she said in a note to clients.
Lien expects the dollar to initially target 103 yen, with resistance at 103.25 yen, the 38.2 percent Fibonacci retracement of its 1998 to 2011 selloff.
U.S. data released on Tuesday showed U.S. import prices fell in April due to a drop in oil costs, a positive sign for household finances that also indicated benign inflation pressures.
Meanwhile, the BOJ could further ease monetary policy as early as October if prices do not rise as quickly as projected, according to economists polled by Reuters, who also upgraded their growth forecasts.
Japanese government bond yields extended gains for a fourth session in early trade.
If the spread between the U.S. 10-year yield and the 10-year Japanese JGB yield widens, Japanese investors would have more incentive to put their funds in overseas bond markets.
The euro tacked on 0.1 percent to $1.2935, moving away from a more than five-week low of $1.2925 hit earlier in the session.
The single currency remains on the defensive amid the potential risk of the European Central Bank slashing its deposit rate into negative territory and charging depositors for parking their funds with the ECB.
The Australian dollar clawed back some ground lost to the greenback, rising 0.2 percent to $0.9912, after it skidded to a fresh a fresh 11-month low of $0.9877 on Tuesday.