FOREX-Dollar rises against yen as market seeks Fed clarity
* Markets wait for Fed to clarify stimulus stance
* U.S. CPI in focus before Fed's meeting on Tues-Wed
* Euro hits 4-month high vs dollar after German ZEW
By Anooja Debnath
LONDON, June 18 (Reuters) - The dollar rose on Tuesday, moving away from recent two-month lows against the yen, with further gains dependent on U.S. Federal Reserve guidance on its monetary policy.
Speculation Fed chief Ben Bernanke may indicate he could start winding down stimulus has led to a sell-off in global stocks in recent weeks, helping the safe-haven yen to its best weekly gain in nearly four years against the dollar last week.
Markets will be looking to Bernanke's news conference on Wednesday after a two-day policy meeting for more clarity on the central bank's stance.
While many in markets see the Fed trimming its asset purchases this year, most see higher interest rates as distant. FX analysts say Bernanke will try to soothe investor nerves and that this explains the dollar's rise against the yen.
"Bernanke will try to downplay the tightening impact of tapering quantitative easing, which could help ease some of the concerns in the market... this could help dollar/yen head higher," said Lee Hardman, currency economist at BTMU.
"If he doesn't help dampen some of those investor fears about QE tapering then dollar/yen could slip."
The dollar was up 1 percent at 95.40 yen having hit a two-month low of 93.75 yen on Thursday. A reported options expiry at 95.35 yen could keep the pair close to that level.
HSBC strategist Daragh Maher expects Bernanke to emphasise that any scaling back of Fed stimulus will depend on data. "While this should be generally dollar bullish, if volatility rises it could see dollar/yen lose ground."
Since Japanese Prime Minister Shinzo Abe called late last year for radical monetary easing to revive the economy, dollar/yen has been driven higher by rises in Japanese share prices.
But worries China is slowing coupled with talk of the Fed withdrawing stimulus led to a stocks selloff and a sharp rise in volatility. This drove investors to the yen which tends to benefit in times of market turmoil.
One-month dollar/yen implied volatility jumped to two-year highs and was last trading at around 15 percent.
In a market preoccupied with the Fed outlook, U.S. consumer price data due at 1230 GMT was also in focus.
"Inflation has been somewhat lower than what the Fed would like... that is drawing concern among some FOMC members which potentially could see them arguing in favour of delaying tapering to a later point in time," Hardman said.
The euro rose 0.1 percent at $1.3383. The single currency had earlier hit a four-month high of $1.3399, a hair's breadth away from a reported options barrier at $1.3400.
The euro firmed after ZEW data showed German analyst and investor sentiment rose in June.
European Central Bank chief Mario Draghi said the bank was "ready to act" if needed, although recent signs of market stabilisation meant monetary policy was proving effective.
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