NEW YORK (Reuters) — The dollar hit a four-year high against the yen yesterday as expectations of strong US economic data this week supported the view that the Federal Reserve may not have to cut interest rates in the near future.But the US currency slipped against the euro as dealers positioned themselves for the latest Fed statement on policy due tomorrow.

While a move in the federal funds rate from 5.25 percent is not expected, the market will be watching for any hint on the course of US monetary policy.

"The big question is whether they give any hints about adopting a neutral bias or keeping a tightening bias," said Ezechiel Copic, currency analyst at IDEAglobal in New York.

"That's where you'll see people parsing words and hanging on phrases," he added.

Early afternoon, the dollar was up 0.3 percent on the day at 121.94 yen , after earlier hitting a four-year peak at 122.19 yen, according to Reuters data.

Traders still expect the European Central Bank to raise interest rates later this year, and that was helping support the common currency, which rose nearly 0.3 percent to $1.2951 .

The Fed has kept US rates steady since August, but repeated warnings about upside inflation risks and a recent bout of firm US housing and manufacturing data have eroded expectations that its next move could be a rate cut.

"Instead of building in a 25-basis-point cut from the Fed, the market now is slowly turning away from that and even saying there could be a tightening. It will take very little to start pricing in a tightening now," said Adam Myers, currency strategist at UBS in London.

Predictions for higher Japanese interest rates, meanwhile, have receded after soft Japanese data, providing a "carry trade" opportunity for investors looking to borrow low-yielding currencies, buy higher-yielding ones and profit on the spread.

With Japanese inflation coming in below expectations last week and retail sales numbers for December showing a year-on-year decline on Monday, the Bank of Japan may find it difficult to justify a rate hike at its February meeting.

"Overall negative sentiment on the yen, along with the carry trade, keeps it weakening," said Camilla Sutton, currency strategist with Scotia Capital in Toronto.

The euro rose 0.6 percent to a session peak at 157.99 yen , not far from last week's record high above 158.60.