* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, July 31 (Reuters) - The Japanese yen weakened against the dollar on Tuesday after the central bank pledged to keep interest rates low and adopted a forward guidance model to strengthen its commitment for its massive policy stimulus.
The yen slipped 0.2 percent against the dollar at 111.25 yen in a volatile session and rebounding off an early low of 110.75 yen hit in Asia.
Japan’s commitment to keep policy settings at record low levels reassured market participants who were wary the Bank of Japan would signal an end to years of policy stimulus and encouraged investors to snap up relatively higher-yielding currencies such as the Australian dollar.
“What the Bank of Japan has done today has signaled a cap on global bond yields and indicated the appetite for risk may have some more room to run,” said Viraj Patel, an FX strategist at ING in London.
The BOJ pledged to maintain its short-term interest rate target at minus 0.1 percent and decided to guide 10-year JGB yields around zero percent.
But the bank also said it would allow long-term rates to fluctuate depending on economic and price developments, and conduct its bond purchases more flexibly.
German and French government bond yields dropped 3 to 4 basis points after the Bank of Japan move and the euro hopped a fifth of a percent higher at $1.17230.
Inflation and GDP data in Europe will be the key data points in focus for the session with any upside surprise likely to stir expectations of hawkish comments from the European Central Bank.
Besides the BOJ, meetings of the Federal Reserve and the Bank of England are in focus this week.
The U.S. central bank is expected to reaffirm the outlook for further gradual rate rises at the end of its two-day rate review through Wednesday while the Bank of England is expected to raise rates on Thursday for only the second time since the 2008 financial crisis. (Reporting by Saikat Chatterjee; Additional reporting by Daniel Leussnik; Editing by Janet Lawrence)