(Recasts, updates prices)
* Investors will focus on Fed’s reaction to recent market turmoil
* Euro weaker, Chinese yuan stable despite Shanghai sell-off
* Aussie and CAD firmer as oil rises above $30 a barrel
By Anirban Nag
LONDON, Jan 26 (Reuters) - The safe-haven yen and the low-yielding euro halted their rise on Tuesday, as stock markets and oil prices recovered, providing some relief to battered commodity-linked and oil-related currencies such as the Australian and Canadian dollars.
The dollar index was flat, with investors cautious before the outcome of the Federal Reserve’s two-day policy meeting beginning later in the day.
Investors will be parsing the U.S central bank’s message to determine what, if any, effect volatile global markets, plummeting oil prices and heightened fears of a Chinese slowdown will have on the Fed’s previously stated intentions to continue raising rates this year.
U.S. interest rate futures implied that traders put the chance of a Fed rate hike this week at just 13 percent. Over the year, markets are pricing in one rate hike, compared to the Fed’s rate path, which factors in at least four rises.
The dollar was flat against the yen at 118.35 yen, while the euro was down 0.2 percent at $1.0825. Both the yen and the euro tend to do well during times of financial market stress, since both Japan and the euro zone usually run current account surpluses.
“There is a fair bit of nervousness going into the Fed meeting. Interest rate markets have postponed rate hikes in 2016 and 2017 so investors expect something dovish from the Fed, given the volatility in stock markets,” said Niels Christensen, FX strategist at Nordea.
“Dollar/yen should be trading with a slight downward bias in the coming few hours.”
In addition to the Fed, investors are also focused on the Bank of Japan’s two-day meeting, which will end on Friday. Most expect no change from the BOJ despite the increasingly worrying data and stressed markets, though speculation that it might muster additional stimulus steps has intensified this week.
“Even if it appears unlikely that the central bank will consider additional policy action as soon as this week, such a step cannot be excluded by the April meeting,” Credit Agricole strategists wrote in a note.
They added that, while these expectations will cap the yen’s rise, if global risk sentiment sours in the near term, it would underpin the currency.
Meanwhile, the Chinese yuan was remarkably stable in offshore trade, trading at 6.6094 yuan per dollar amid talk that Chinese authorities wanted stability in the onshore market and were keen to limit the damage from a 6 percent slide in the Shanghai stock market.
The Australian dollar, a more liquid proxy for China, was 0.2 percent higher at $0.6941, as European stock markets trimmed losses and crude oil rose above $30 a barrel. The Canadian dollar was also up 0.3 percent against the U.S. dollar. (Editing by Dominic Evans)