* Dollar index hovers near 16-month peak
* Yen hits a three-week low, BoJ monetary policy meet due Wednesday
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Vatsal Srivastava
SINGAPORE, Oct 31 (Reuters) - The dollar hovered near 16-month highs versus a basket of its major rivals after gaining overnight as traders bet on the relative outperformance of the U.S. economy and continued rate increases by the Federal Reserve.
The Fed staying ahead of the curve on its tightening path would be further underscored by expectations the Bank of Japan would leave its easy policy intact when it reviews rates later in the day.
The dollar strengthened to a three-week high versus the Japanese yen trade at 113.21, having gained 0.6 percent the previous day.
The BOJ is expected to signal its readiness to maintain its massive stimulus programme for the time being, as global trade frictions and financial market jitters cloud the economic outlook.
“We don’t expect any fireworks from today’s BoJ meeting. They are most likely to re-iterate the message that they are going to stay patient with respect to accommodative policy,” said Sim Moh Siong, currency strategist at Bank of Singapore.
“I still see the main driver for the dollar/yen to be U.S. 10 year bond yields and the overall level of risk aversion in the system which can be gauged by the VIX index.”
The U.S. 10-year treasury bond yields have been inching higher for the last three sessions and was last traded at 3.12 percent. This when compared with the 10-year Japanese government bond yield of 0.12 percent, highlights the gap in favour of the dollar.
The dollar index, a gauge of its value versus six major peers, kept its overnight gains to trade at 97.
It climbed to a 16-month high at 97.02 on Tuesday, backed by stronger than expected U.S. economic data as well as deteriorating fundamentals for the euro, which makes up around 58 percent of the index.
U.S. consumer confidence rose to an 18-year high in October, driven largely a robust labour market, suggesting strong economic growth could persist in the near term. That follows last week’s data which showed the U.S. economy slowed less than expected in the third quarter.
In contrast, economic data out of Europe disappointed analysts as the euro zone economy grew less than expected in the third quarter.
The euro changed hands at $1.1343, steady from its New York close. The single currency has lost 2.3 percent versus the greenback in October.
The sterling held close to its mid-August lows, hovering at $1.2705, after credit ratings agency Standard & Poor’s said a ‘no-deal’ Brexit would be likely to tip Britain into a recession on Tuesday.[
Sterling traders would be turning their attention to the Bank of England’s monetary policy meeting on Thursday, when it is expected to keep interest rates on hold and detail conditions necessary for policy tightening.
Focus in Asia would also be on the Chinese yuan currency, which hit a 10-year low this week on growing worries over the economic fallout of a heated Sino-U.S. trade row.
The yuan traded marginally weaker at 6.97 per dollar in offshore trade.
The yuan has been pressured by worries about slowing Chinese economic growth and a potential sharp escalation in the U.S.-China trade war, falling this week to its lowest level in a decade in onshore trading.
The Australian dollar dipped 0.35 percent to $0.7080 after the release of domestic inflation data.
Reporting by Vatsal Srivastava Editing by Shri Navaratnam