* Dollar/yen down 0.5 pct after hitting high of Y90.25
* Traders winding back yen selling ahead of BOJ decisions
* Markets position for aggressive action from BOJ
* Sterling hurt by weak British retail sales data
By Hideyuki Sano
TOKYO, Jan 21 The yen plunged into a fresh 2-1/2
year low against the dollar before quickly bouncing back on
Monday as traders nervously braced for a Bank of Japan meeting
that could see the central bank commit to an aggressive
Facing relentless political pressure to pull the country out
of deflation, the BOJ is expected to unveil a raft of policy
steps including a 2 percent inflation target at its two-day
meeting that ends on Tuesday.
The dollar rose to as high as 90.25 yen in early
trade, edging past the previous high around 90.21 set Friday.
But as traders rushed to lock in gains on caution ahead of the
BOJ's policy meeting, it slipped to 89.70, 0.5 percent below its
late U.S. levels last week.
Since mid-November, the dollar has risen about 13 percent on
"From here we will probably see rallies sold into in
euro/yen, Aussie/yen etc as the street reduces short yen
positions into the BOJ meeting tomorrow," said Jeffrey Halley,
FX trader for Saxo Capital Markets in Singapore.
The euro bought 119.50 yen, off a 20-month peak
of 120.73 last week while the Australian dollar shed 0.3 percent
to 94.40 yen, slipping from a four-year high of 95.02
"We think the whole hope on the BOJ's policy will be peaking
out soon barring any surprises tomorrow," said Minori Uchida,
chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
"The dollar could rise to as high as 91 yen but it will
eventually return to 80-85 yen," he added.
Market expectations on the BOJ meeting are unusually high.
Traders say financial markets are expecting a joint statement
with the government to target two percent inflation, an increase
in asset purchases with an open-end commitment, and possibly
other measures such as cutting interest rates on excess
Data last Friday showed currency speculators slightly
trimmed their bets against the yen in the week to Jan. 15,
although they remained overwhelmingly negative on the currency.
Many market players remain pessimistic on the yen.
"We expect the door for further easing will likely be left
open irrespective of the outcome of BOJ policy meeting, either
explicitly by the BOJ or implicitly through government's plan to
nominate doves to replace the governor and deputy governors,"
analysts at Barclays Capital wrote in a client note dated Jan.
"Expectations of an aggressive monetary policy stance under
new BOJ leadership are likely to provide support for USD/JPY in
coming weeks. A post-announcement dip, if any, would provide
better a entry level to go long USD/JPY."
Traders said there has been strong demand for options
betting on further yen weakness, with one-month dollar/yen
implied volatility - a measure of expected price
movement - rising to its highest since August 2011 on Friday.
One-month risk reversals showed rising demand
for yen puts, or bets on the yen falling.
With all eyes on the BOJ, other currencies took somewhat of a
The euro stood flat at $1.3323, having been capped by
the $1.3400 level in the past week and facing strong resistance
just under $1.3500.
The single currency showed muted response to a victory of
Germany's centre-left opposition in a regional vote in Lower
Saxony on Sunday. The euro crisis did not play much of a role in
Sterling slipped to a two-month low of $1.5838,
remaining under pressure after an unexpected fall in retail
sales last month raised the likelihood that Britain was slipping
into its third recession in four years.
The Australian dollar, which came under a bit of profit
taking late last week, continued to see good support under
$1.0500. It was last at $1.0507, having bounced off a
1-1/2 week low of $1.0485 Friday.