* Dollar supported by expectations for more Fed tapering
* WSJ says Fed could announce further tapering next week
* Story seen reinforcing prevailing market expectations
* Kiwi rallies as inflation data heats up January rate hike call
* BOJ kicks off two-day policy meeting
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, Jan 21 (Reuters) - The dollar rose versus the yen on Tuesday, helped by renewed talk that the U.S. Federal Reserve may announce a further reduction of its bond-buying stimulus next week, while the New Zealand dollar surged after a surprise pick-up in inflation.
The U.S. dollar advanced 0.5 percent to 104.65 yen, bringing it closer to possible resistance near 104.92 yen, an intraday high hit on Jan. 16.
Traders said a story in the Wall Street Journal’s online edition saying the Fed could announce a further reduction to its monthly bond purchases at the end of its Jan. 28-29 policy meeting, to $65 billion from the current $75 billion, gave the dollar a boost.
Such a reduction would be in line with the prevailing market expectations in a recent Reuters survey.
“I think heading into this week the expectation was for the Fed to announce a further reduction in the QE. The article reinforced the expectation. It’s not a surprise,” said Sim Moh Siong, FX strategist for Bank of Singapore.
Still, traders said the WSJ article was enough to help nudge the dollar higher against the yen, with additional impetus coming from a firm tone in regional equities including Japan’s benchmark Nikkei share average.
An uptick in risk appetite, underpinned by a rise in equities, could further spur selling of the low-yielding yen, a traditional safe-haven currency.
Key for the yen this week is the outcome of the Bank of Japan policy meeting due on Wednesday. The BOJ is expected to retain a wait-and-see approach, having last year launched a massive stimulus programme.
“We’re expecting BoJ Governor Haruhiko Kuroda to reiterate his pledge of achieving the 2 percent inflation target by 2015, and the policy meeting may do little to halt the recent strength in the low-yielding currency as the central bank preserves its current policy,” said David Song, analyst at DailyFX.
“However, the threat of a slowing recovery may spur a greater rift within the BoJ, where we may see a growing argument to implement a more dovish twist to the forward-guidance for monetary policy.”
Overall, the dollar’s moves were fairly subdued.
The euro held steady at about $1.3552, staying above a two-month low of $1.3508 that had been set on Monday. Against the yen, the euro rose 0.4 percent to 141.83 yen.
New Zealand dollar shot out of the starting block early on Tuesday after inflation data strengthened the case for higher interest rates at home.
The kiwi dollar last changed hands at $0.8324, having rallied over half a U.S. cent after fourth-quarter consumer price index rose 0.1 percent, confounding forecasts for a 0.1 percent fall.
For an economy firing on all cylinders, the data strengthened bets the Reserve Bank of New Zealand could lift rates as early as next week, sparking a turnaround in the kiwi which slid to a one-week low of $0.8212 on Monday.
Michael Turner, strategist at RBC said the breakdown of the data confirmed the domestic economy was starting to generate some inflationary pressures.
“Today’s data leave that door (to a January rate hike) well and truly ajar though we continue to see risks remaining skewed toward March,” he said.