NEW YORK (Reuters) - The yen fell against the dollar and euro for a fourth straight day on Wednesday, after the Bank of Japan raised key interest rates for the first time since July but suggested 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 that showed prices rose at a faster pace than expected in January also supported the dollar as it reinforced the view that U.S. interest rates will not fall any time soon.
This view was reinforced by the minutes of the January 30-31 meeting of the Federal Open Market Committee, which suggested policymakers were uncertain inflation was firmly on a downward path.
"We got a bit of a boost from the higher CPI numbers this morning," said Ronald Simpson, managing director of global currency analysis for Action Economics in Tampa, Florida.
"We've got the BOJ behind us and they raised rates, but again, going from 0.25 percent to 0.50 percent isn't going to scare away too many of those accounts interested in the carry trade," he said.
The dollar rose 0.8 percent against the yen to trade at 120.91 yen, as the Japanese currency retraced almost all the gains of the past week.
The euro last traded at 158.92 yen, according to electronic trading platform EBS, after climbing to a new record of 159.05 yen in the New York session.
Against the dollar, the euro was up marginally at $1.3140.
Even with Wednesday's rate hike to 0.5 percent, the highest in a decade, Japanese interest rates are the lowest in the industrialized world. Investors doubt the BOJ could raise 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.
The dollar rose briefly 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.
"(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, which would likely allow the Fed to keep rates steady at 5.25 percent.
Fed Vice Chairman Donald Kohn said U.S. financial markets appear to be priced for a "very stable outlook." Kohn said he expected global imbalances to work themselves out.
In other trading, the yen fell to a one-month low against the New Zealand dollar, the highest yielder among major currencies, as the carry trade returned into focus. The kiwi also hit seven-week highs versus the greenback.
Additional reporting by Kevin Plumberg and Nick Olivari