NEW YORK (Reuters) - The U.S. dollar climbed against the yen for the first time in five sessions on Monday, as stock markets rallied on expectations the Federal Reserve's policy announcement this week will reassure investors that monetary stimulus will remain in place.
The yen weakened again though in mid-afternoon New York trade, following headlines from the Group of Eight meeting in Northern Ireland. Traders said world leaders continue to back Japan's current stimulus efforts, opening the door for further yen weakening.
The U.S. currency remained the clear theme of the day's trade. The U.S. currency extended gains as New York opened after data showed growth in New York state's manufacturing sector picked up in June, while sentiment among U.S. homebuilders surged to the highest in seven years.
Speculation the Fed will start winding down its stimulus program has led to a selloff in global equities in recent weeks, helping the yen post its best weekly gain in nearly four years against the dollar last week. The yen has exhibited a close inverse relationship with equities, especially Japanese shares.
After recent volatility, investors are hoping that Fed Chairman Ben Bernanke will reassure markets that the central bank's policy will stay accommodative.
The Financial Times on Monday reported Bernanke is likely to signal the US central bank is close to slowing its $85 billion-a-month in bond buying, but stipulate much depends on what happens to the economy.
"The dollar has been selling off over the last week or so, so I think it probably has more room to gain than to lose," said John Doyle, currency strategist at Tempus Inc in Washington on Monday. "That said, if (Bernanke) comes out and basically shoots down any idea of tapering back QE this year, then obviously the dollar is going to weaken on that news."
The dollar rose 0.5 percent to 94.96 yen, with the session peak at 95.21 yen, helped by gains in Japan's Nikkei share average .N225. U.S. and European stocks also climbed. It had earlier hit a session low of 94.08 yen, not far from a two-month low of 93.78 yen set on Thursday. Support is seen around 93.57, the 38.2 percent retracement of its September-May rally.
Christopher Vecchio, currency analyst at DailyFX in New York said there had been increased market talk in recent days that the Fed could test market resolve by cutting Q3 by only $5 billion or so, but he noted the Fed triggers to slow down stimulus, being 6.5 percent unemployment or annual inflation of 2.5 percent, are not close.
Speculator positioning, which showed a decline of long dollar bets from extreme levels last Tuesday, with the data being released Friday, could also support a bounce in the dollar after the Fed meeting, analysts at BNP Paribas said.
The value of the dollar's net long position - or bets on further gains - fell to $28.28 billion in the week ended June 11, from $39.12 billion the previous week, according to Reuters calculations. In late May, long dollar bets hit $43.77 billion, the highest since at least June 2008.
Higher-yielding assets have been the victim of disappointment over Japan's lack of new policy moves and uncertainty about the Fed. Those factors have led to wild swings in Tokyo shares and forced investors to unwind short yen positions in recent weeks.
The yen also weakened against other major currencies, with the euro rising 0.6 percent to 126.30 yen, still within sight of a two-month trough of 124.95 hit last week. The Australian dollar gained 0.6 percent and the Canadian dollar rose 0.8 percent.
Over the medium term, with the Fed chief likely to reiterate that the U.S. economy will continue to grow, prospects for the dollar appear to be bright, analysts said.
"Fundamentally, the U.S. economic acceleration this summer and the Fed's first steps towards the exit in third-quarter 2013 should lift the dollar through the second half of the year. We see dollar/yen at 110 yen and euro/dollar at $1.20 by year end," Societe Generale said in a note on Monday.
The euro reversed losses late in the New York session and climbed 0.2 percent to $1.3373 with the session peak at $1.3379, not far off a 3-1/2-month high of $1.3390 set on Thursday. Analysts said the move reflected positioning ahead of Wednesday's Fed meeting.
Reporting by Nick Olivari and Wanfeng Zhou