* Yen pressured as Japan posts 17th straight trade deficit
* Most investors still doubt Fed will taper this week
* German IFO in line with expectations
* U.S. housing starts surge in November
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 18 The dollar rose against the yen
and the euro, helped by a rise in U.S. Treasury yields, as
investors adjusted positions ahead of a Federal Reserve decision
on Wednesday on whether to start paring back monetary stimulus
Many market participants do not expect any major policy
change from the Federal Open Market Committee with regard to its
bond-buying program, but in recent days the perceived chance
that the Fed will start tapering this week has risen. That has
kept yields on U.S. 10-year notes elevated, broadly
helping the dollar.
The Fed will announce its policy decision at 1900 GMT.
Chairman Ben Bernanke will hold a news conference at 1930 GMT.
"If, as we think more likely, the FOMC does not announce a
taper today, we do think the FOMC may become more specific on
the tapering horizon, perhaps by adding a lower threshold on the
unemployment rate that (it) would like to see before ending
quantitative easing, say, below 7 percent," said Thierry Albert
Wizman, interest rate and currency strategist, at Macquarie
Group Limited in New York.
"Markets will generally still assume that the taper takes
place in the first quarter of 2014."
In midday trading, the dollar rose 0.5 percent against the
yen to 103.16 yen. The euro was slightly lower against
the dollar at $1.3762.
The euro shrugged off a German IFO survey that was in line
with expectations. Year-end repatriation flows and higher
money-market rates continued to lend it support before the Fed's
Euro/dollar overnight implied volatilities - a gauge of how
sharp price swings can be - shot up on Wednesday before a
possible move by the Fed. The overnight euro implied vols more
than doubled to 13.70 percent from around 5.5 percent on
Strong November U.S. housing starts, meanwhile, failed to
ignite a reaction in the forex market, but they did add to
growing evidence that the world's largest economy is on a steady
path to recovery. Housing starts surged to their highest in
nearly six years, jumping 22.7 percent.
For Andrew Wilkinson, chief economic strategist at Miller,
Tabak & Co, the robust housing starts report justifies the
firm's call for a small amount of Fed tapering this month.
"We see the economy better-positioned and poised for
strengthening growth into next year," Wilkinson said. "Recent
hiring in construction and continued buoyancy as the housing
market builds momentum vindicates our stance and the latest
blockbuster report did not disappoint."
Should the Fed choose to move, most in the market expect it
to trim its monthly $85 billion bond-buying program by $10
billion to $15 billion at most. A no-taper decision on Wednesday
could still dent the dollar, although it may hold its own
against the yen, which tends to weaken when risk appetite rises.
Earlier, a widening Japanese trade deficit pulled the yen
down. Data released on Wednesday showed Japan posted a deficit
of 1.29 trillion yen ($12.56 billion) in November, marking a
record 17 straight months of deficits as a weak yen inflated the
cost of imported fuels.
"That trend (of rising deficits) may continue in advance of
the April 2014 sales tax hike," said Chris Turner, head of FX
strategy at ING.
"U.S. rates look like they will rise, and barring an equity
market collapse on a surprise Fed taper, dollar/yen should push
on to 105 by year-end."
Meanwhile, sterling jumped after UK unemployment fell by
more than expected, raising expectations that rates might rise
earlier than previously forecast. Sterling hit a session high of
$1.6404 and was last up 0.8 percent at $1.6392. The euro,
meanwhile, dropped 0.7 percent to 83.96 pence.