* Yen edges up as interest rate gap expected to narrow
* Dollar index hits three-year high
By Shinichi Saoshiro
TOKYO, March 3 (Reuters) - The yen edged up broadly on Tuesday as the gap in interest rates between Japan and other countries is expected to narrow this week.
The dollar index, a gauge of the currency's strength against a basket of six other major currencies, hit a three-year high on Tuesday. But the greenback dipped against the yen.
"The market focus has shifted from Japan to Europe and the United States," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust Bank.
"We saw AIG's results and will also get to see data showing the latest economic conditions in the United States. Europe awaits the ECB's rates decision. These factors and events are not expected to favour their currencies," Inoue said.
Closely watched U.S. data to be released this week include the non-manufacturing ISM index on Wednesday and non-farm payrolls on Friday.
Market players said the yen was also enjoying a technical rebound after last week's sharp downturn on concerns over the Japanese economy and political malaise, among other factors.
More immediately, traders are focusing on the interest rate decisions due from a number of central banks this week.
The Bank of Japan has kept rates at a low 0.10 percent but the gap with other countries has narrowed significantly over the past year as other central banks have steadily chopped down rates to combat the global economic downturn.
The Reserve Bank of Australia will announce its decision on interest rates at 0330 GMT on Tuesday. The consensus is for it to cut rates by 25 basis points to a record low 3 percent.
The European Central Bank is expected to cut interest rates to an all-time low of 1.5 percent from the current 2 percent on Thursday.
A Reuters poll showed that the Bank of England is also expected to slash rates by 50 basis points to a record low 0.5 percent when it meets on Thursday.
The dollar dipped 0.3 percent to 97.19 yen after hitting a 3-½ month high of 98.72 yen last week.
The euro fell 0.4 percent to 122.20 yen after poking above 126.00 yen last week to a seven-week high. The yen also gained against the Australian dollar and the sterling.
The dollar index dipped 0.1 percent to 88.921 after hitting a new three-year high of 89.026..
The U.S. currency was supported the previous day as steep losses on Wall Street and dire financial news including insurer AIG's record loss increased worries about the global credit crisis, boosting the dollar's safe-haven allure.
The euro inched down 0.1 percent to $1.2567 in the wake of European Union leaders' rejection of a mass bailout for Eastern Europe, which weighed on the single currency the previous day. (Editing by Hugh Lawson)