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FOREX-Dollar hovers above 2-month low vs yen; Fed policy signals eyed
June 18, 2013 / 1:04 AM / 4 years ago

FOREX-Dollar hovers above 2-month low vs yen; Fed policy signals eyed

* Market nervous ahead of Fed signals on stimulus

* Dollar/yen outlook tied to stocks, rather than U.S. bond yields

* U.S. CPI in focus ahead of Fed’s meeting on Tues-Wed

By Hideyuki Sano

TOKYO, June 18 (Reuters) - The U.S. dollar hovered above a two-month low against the yen on Tuesday but uncertainty ahead of the outcome of the U.S. Federal Reserve meeting is likely to cap further gains.

The dollar fetched 94.61 yen in early Asian trade, little changed from late U.S. levels after positing its first gains in five sessions on Monday. It wasn’t far off a two-month low of 93.75 set on Thursday.

The dollar/yen pair has recently been driven by share price moves, especially Japanese equities, rather than U.S. bond yields, which traditionally have a strong correlation.

A sharp slide in Tokyo stocks recently has led to an unwinding of short yen positions, helping pull the Japanese currency off a 4-1/2-year low against the dollar reached last month.

Speculation the Fed will start winding down its stimulus program has led to a selloff in global equities in recent weeks, helping the yen post its best weekly gain in nearly four years against the dollar last week.

On Monday, the U.S. currency extended gains after data showed growth in New York state’s manufacturing sector picked up in June, while sentiment among U.S. homebuilders surged to the highest in seven years.

In a market preoccupied with the course of the Fed’s policy, U.S. consumer price data due at 1230 GMT is likely to attract some attention as low inflation numbers in recent months have helped the case for maintaining stimulus.

Economists expect core consumer price index to have risen 0.2 percent in May, or an annual inflation of 1.7 percent.

“A softer reading could fan expectations that the Fed will strike a dovish tone, likely bringing down U.S. bond yields and boosting stocks,” said Junya Tanase, chief FX strategist at JPMorgan Chase.

The dollar/yen pair is likely to rise given the yen’s recent inverse correlation with stocks, Tanase added.

Still, some analysts don’t rule out the risk of a further fall in the dollar/yen.

“The dollar had risen 24 yen since late last year and hasn’t come down even halfway from that. I expect continued weakness in the dollar,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank, noting that there are still big yen-selling positions.

The euro stood little changed at $1.3362 still within sight of a four-month peak of $1.3390 hit on June 13.

The common currency has been helped by comments from European Central Bank President Mario Draghi earlier this month that a cut in the bank’s deposit rate below zero was not on the cards.

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