SYDNEY (Reuters) - The yen's recent violent selloff came to an abrupt halt Tuesday as investors waited to see if the Bank of Japan would deliver its most aggressive effort yet to beat years of economic stagnation, or disappoint as so often in the past.
The dollar bought 89.63 yen, having peaked at a 2-1/2 year high of 90.25 on Monday. Since December 4, the dollar has rallied an eye-watering 10 percent on the yen.
The BOJ, which is starting its policy-setting meeting earlier than usual, is under intense political pressure to overcome deflation and lift the world's third biggest economy out of recession.
But the Japanese central bank has a track record of disappointing markets and traders said if it simply announces a new inflation target of 2 percent and raises the ceiling of its asset-buying programme by 10 trillion yen, the yen could bounce back strongly.
"Given the transparency surrounding this meeting...there is a strong possibility that this is a typical 'buy the rumour, sell the news' event," said Christopher Vecchio, currency analyst at DailyFX.
On the other hand, if the BOJ committed to an open-ended asset-buying programme until its new inflation target is within grasp, traders said the yen could stay under pressure.
The euro was at 119.38 yen, recoiling from a 20-month high around 120.73 set Friday. Trading was subdued overnight with U.S. markets closed on Monday for a public holiday.
Against the dollar, the single currency was little changed at $1.3315. Since reaching a 10-month high of $1.3404 a week ago, the euro has struggled with selling interest seen above $1.3400.
Still, with the European Central Bank recently sounding more cheerful about the outlook for the euro zone and dimming the prospects of more rate cuts, analysts suspect the euro can continue to outperform the dollar in the near term.
The Bundesbank said on Monday Germany's economic slump should be short-lived, adding that the euro zone's largest economy could have already bottomed out.
Commodity currencies also had a relatively sedated session overnight, leaving them steady against the greenback. The Australian dollar was at $1.0517, having traded in a slim range roughly between $1.0493/0525. Support is seen under $1.0500.
The BOJ aside, there is no major economic news out of Asia on Tuesday. In Europe, a closely watched ZEW survey is expected to show German business morale and investor sentiment improved further in January.
(Editing by Wayne Cole)