FOREX-Yen steadies, markets cautious before BOJ meeting
* Yen within sight of one-month high vs dollar
* Investors nervous BOJ easing may disappoint expectations
* Euro on back foot before ECB meeting on Thursday
By Nia Williams
LONDON, April 3 (Reuters) - The yen steadied within sight of a one-month high against the dollar on Wednesday, with investors wary ahead of a Bank of Japan policy decision that could disappoint some expectations of aggressive monetary easing.
Market players were also focused on Thursday's policy decision from the European Central Bank, after which President Mario Draghi could strike a dovish tone given recent weak euro zone data, Italian political turmoil and concerns about the fallout from a financial rescue for Cyprus.
Those worries helped nudge the euro lower against the dollar, although many analysts said losses were likely to be limited before the ECB meeting.
"The story of the day is the market will be reluctant to do anything because it's scared of being caught wrongfooted by what comes out of Japan tonight and the ECB meeting tomorrow," said Daragh Maher, FX strategist at HSBC.
The dollar was close to flat against the yen at 93.43 yen, holding above a one-month low of 92.57 yen set on Tuesday. The U.S. currency was still some way off a 3-1/2 year high of 96.71 yen set last month.
The BOJ is widely expected to ramp up its bond buying and extend the maturities of the bonds it purchases at the April 3-4 policy meeting.
But many investors who have sold the yen in anticipation of bold stimulus measures to beat deflation in Japan are worried the BOJ, in its first policy review under new governor Haruhiko Kuroda, might not live up to expectations.
The dollar has climbed around 20 percent against the yen since November, when markets first started pricing in more aggressive monetary easing from the BOJ, and disappointment could see the U.S. currency retrace some of those gains
"The bar is high for the BOJ to meet or exceed market expectations," said Roy Teo, FX strategist for ABN AMRO Bank in Singapore, although he added any forward guidance from Kuroda on the prospects for future stimulus may support the dollar.
"I do see the 90 to 91 level as quite good support for dollar/yen," he added.
As a result of wariness ahead of the meeting long positions in the dollar versus the yen have likely been pared back over the past few weeks, traders said. That lighter positioning may limit the scope of any drop in the dollar after the BOJ's decision on Thursday.
The euro slipped 0.1 percent versus the dollar to $1.2806 , staying near a four-month low of $1.2750 set last week.
The single currency has been on the back foot after a business survey showed on Tuesday that manufacturing across the euro zone fell deeper into decline in March.
Political impasse in Italy, where attempts to form a government have so far failed, and concerns about the implications of Cyprus's bailout for other indebted euro zone countries also curbed demand.
Although the ECB is expected to keep interest rates unchanged at this week's meeting, analysts said the overall trend was for a drift lower in the euro.
"There does seem to be a bias towards looking for a slightly weaker euro ahead of Draghi because of soft numbers yesterday, and we still have the Italian carry-on and Cyprus," said HSBC's Maher.
In the near-term last week's low of $1.2750 is likely to provide support for the euro, while any gains could be capped by the 200-day moving average at $1.2889.
The euro was close to flat against the yen at 119.71 yen, near Tuesday's five-week low of 119.15 yen.