FOREX-Dollar stabilises vs yen as investors brace for Fed meeting

Mon Jan 27, 2014 10:06pm EST

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

* Dollar inches up against yen, holds above Monday's 7-week low

By Lisa Twaronite and Masayuki Kitano

TOKYO/SINGAPORE, 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 inched up 0.1 percent to 102.63 yen, after dropping as low as 101.77 yen on Monday, its lowest since early December.

One near-term focal point for the market is an emergency meeting by Turkey's central bank that will be held on Tuesday. A statement on the outcome is due to be released at 2200 GMT.

The central bank is expected to raise its overnight lending rate by 225 basis points to 10 percent on Tuesday, according to the median forecast in a Reuters poll. It was unclear, however, whether it would be enough to stem a slide in the lira, one of the focal points in the current turmoil hounding emerging markets.

A rate hike by Turkey's central bank won't provide a fundamental solution to the lira's woes, which stem from the country's current account deficit, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

"There will probably be some short-covering, but it's not something that can be solved just by raising interest rates or via capital controls," Okagawa said.

Still, an interest rate rise could help support the lira in the near-term and that in turn could temper risk aversion and yen-buying pressure in the short term, he added.

The euro was flat against the dollar near $1.3674, after having touched a three-week high of $1.3740 on Friday.

The Australian dollar edged higher after a measure of Australian business conditions jumped to its highest in more than 2-1/2 years in December.

The Aussie dollar rose 0.3 percent to $0.8761, pulling away from Friday's low of $0.8660, its lowest level since July 2010.

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