TOKYO, May 15 (Reuters) The yen matched a three-month low against the dollar on Tuesday on surprisingly weak machinery orders data that underscored market expectations for the Bank of Japan to raise interest rates only gradually.

Japan's core private-sector machinery orders, a key gauge of corporate capital spending, fell 4.5 percent in March from the previous month, government data showed, well short of market expectations for a 1.3 percent rise.

''There was a big divergence from expectations and the yen is being sold. The outlook for machinery orders was also weak,'' said Masafumi Yamamoto, a currency strategist for Nikko Citigroup.

In addition to the headline figure, the data showed that manufacturers expect core machinery orders to fall 11.8 percent in April-June from the previous quarter.

The dollar rose to 120.43 yen as of 0025 GMT, up from around 120.35 yen in late U.S. trading on Monday.

The dollar earlier rose as high as 120.54 yen on electronic trading platform EBS, matching a rate hit last week that was the highest since Feb. 27.

The euro was steady at .3542 Citigroup's Yamamoto said, however, that the machinery orders data was unlikely to drastically alter market expectations for the Bank of Japan to raise interest rates to 0.75 percent from 0.50 percent as early as around August.

''If you look at data in the BOJ tankan, the outlook for capital spending isn't all that bad,'' Yamamoto said.

''I don't think this means that a BOJ rate rise in August has become impossible.'' Traders said the yen could get a boost if Japan's January-March gross domestic product due on Thursday comes in stronger than expected.

There is also a focus on remarks by Bank of Japan Governor Toshihiko Fukui on Thursday after a two-day BOJ policy meeting.

The BOJ is widely expected to keep rates steady at 0.50 percent this week.

REUTERS PDS VP0715