* Dollar index inches away from 7-month highs
* Euro edges away from lows as ECB awaited
TOKYO, Oct 18 (Reuters) - The dollar took a breather from its recent gains on Tuesday, edging away from seven-month highs against a currency basket as investors took stock of U.S. monetary policy expectations over the near term.
The dollar index, which tracks the greenback against six major rivals, slipped 0.2 percent to 97.733, after rising as high as 98.169 in the previous session, its highest level since March 10.
Against the yen, the dollar was down 0.2 percent at 103.72 .
“Rangebound trading continues, with the 104 level heavy for the dollar-yen,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. “It’s just short-term guys, playing in the market.”
U.S. interest rates remain a key focus of the markets, he said, with a December rate hike still anticipated.
However, a rate increase this year is still not a done deal.
Federal Reserve Vice Chairman Stanley Fischer said on Monday that economic stability could be threatened by low interest rates, but it was “not that simple” for the Fed to hike.
A suggestion by Federal Reserve Chair Janet Yellen on Friday that the central bank may allow inflation to exceed its 2 percent target pushed U.S. bond yields to four-month highs and gave the dollar a lift.
The euro added 0.2 percent to $1.1017, moving away from a nearly three-month low of $1.0962 hit on Monday, as investors looked ahead to the European Central Bank’s policy meeting later this week.
The ECB may discuss technical changes that would allow it to extend its 1.7 trillion-euro of asset purchases beyond the March 2017 end-date, at a time when talk of potentially “tapering” its scheme has put markets on edge.
Recently battered sterling added 0.4 percent to $1.2230 .
Sterling’s near-20 percent plunge since the United Kingdom’s vote to leave the European Union has sent inflation expectations soaring, driving investors to trim bets on further interest rate cuts and other potential Bank of England stimulus measures this year. (Reporting by Tokyo markets team; Editing by Shri Navaratnam)