FOREX-Dollar on firmer footing as investors brace for Fed meeting

Mon Jan 27, 2014 7:32pm EST

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* Anxiety about emerging markets remains, with Fed seen on track for more tapering

* Dollar, euro steady against yen, holding above Monday's 7-week lows

By Lisa Twaronite

TOKYO, Jan 28 (Reuters) - The dollar regained a firmer footing against the yen on Tuesday, as expectations the U.S. Federal Reserve will scale back its stimulus further pulled the U.S. currency off a seven-week low against its Japanese counterpart.

While anxiety about emerging markets has increased the safe-haven appeal of the yen, investors were wary of taking aggressive positions against the dollar ahead of the Fed's two-day meeting beginning later in the session.

The U.S. central bank is seen as likely to slice another $10 billion from its bond buying, as they focus more on the recovering U.S. economy and less on the recent rumbles in emerging markets.

"We expect the Fed taper to continue at a pace of $10 billion per meeting. It is also likely to upgrade its assessment of the economy, although December's new home sales data show a weaker rebound in housing demand than was previously thought," strategists at Barclays said in a note to clients.

Investors fear the Fed's stimulus withdrawal could pull funds out of the emerging markets to which it had flowed, at the same time that tightening credit conditions in China threatens to sap that country's growth. These twin factors have led to a risk-asset rout in recent sessions.

Emerging markets currencies remain under pressure, though most analysts believe a full-blown crisis is unlikely at the moment.

The dollar rose about 0.1 percent on the day to 102.65 yen , after dropping as low as 101.77 yen on Monday, its lowest since early December.

One-month implied volatility, a measure of the degree to which investors expect a currency will move, in dollar/yen was at 9.55 percent. It had spiked as high as 10.125 percent on Monday, its highest since mid-December, from a low of 7.975 percent as recently as Thursday.

The euro was steady on the day at 140.26 yen, holding well above a seven-week low of 139.12 yen struck on Monday.

The euro was also flat against the dollar at $1.3672, not far from a three-week high of $1.3740 touched on Friday.

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