The dollar edged up against the euro on Wednesday, recovering from an initial drop after the Federal Reserve raised interest rates for a 10th straight time and indicated even more are on the way. The yen was buoyed broadly by foreign investors chasing Tokyo shares higher as the Nikkei rose 1.5 percent to 15-month peaks and as more data showed a brightening outlook for Japan's economy. The dollar had dipped after the Fed failed to deliver a stiffer warning about combating inflation pressures in its post-meeting statement. Still, the U.S. central bank lifted its funds rate to 3.5 percent, as expected, and said more "measured" increases were likely. The central bank gave no signal it would soon wrap up the credit tightening campaign that began in June last year. Mounting evidence of strong U.S. growth has prompted more economists to lift their forecasts for the fed funds rate to peak at 5 percent in 2006. Just a few months ago most had expected the Fed to pause around 4 percent. "There's more room for markets to be surprised and re-price for higher rates," said Ray Farris, director of Asian forex strategy at Credit Suisse First Boston in Singapore. "As that happens, it should be a positive for the dollar, especially against the euro." CSFB has forecast a 5 percent fed funds rate. Deutsche Bank and Goldman Sachs upped their forecasts to 5 percent this week. While the prospect of even higher overnight U.S. rates has done nothing to help reinvigorate the dollar's rally this year, some analysts said the lure of fatter returns on dollar deposits should soon prod investors to start buying the U.S. currency. Morgan Stanley's currency strategists said in a note to clients that the Fed is far from finished. "We continue to look for additional dollar appreciation into year end and believe the recent softness is temporary in nature," they said. The dollar's widening interest rate advantage has driven it up about 10 percent against the euro and 9 percent against the yen so far this year, overshadowing the fears about the U.S. deficits. U.S. trade data will be released later in the week. By midday in Tokyo, the euro was down a tad against the U.S. currency to near $1.2360 after falling close to $1.2340, about where it was before the Fed decision. The single currency had hit a two-month high of $1.2418 on Tuesday. The dollar fell half a percent against the yen to around 111.40 yen per dollar but remained in a broad range over the past few weeks between 112.90 yen and 110.70 yen. Traders again cited Japanese investors repatriating coupon payments on U.S. Treasuries as helping the yen. Those coupon payments are likely being used to brush up portfolios before the fiscal half-year ends in September. The euro also dropped half a percent against the Japanese currency to 137.65 yen down from a three-and-a-half month high of 138.84 struck on Monday as worries ease about the political fallout in Japan from a Sept. 11 snap election. Japanese data on Wednesday showed wholesale prices rising 1.5 percent year-over-year in July, above forecasts and providing more hope that the economy could shake off its seven-year bout of deflation late this year or early next year.