June 18, 2013 / 4:46 PM / in 5 years

FOREX-Dollar rises versus yen before Fed; euro gains on data

* Markets wait for Fed to clarify stimulus stance
    * Bernanke expected to soothe market fears
    * Euro hits 4-month high vs dollar after German data

    By Wanfeng Zhou
    NEW YORK, June 18 (Reuters) - The U.S. dollar rose for a
second day against the yen on Tuesday as some traders bet the
Federal Reserve may signal it is almost ready to reduce its bond
buying program aimed at propping up the economy.
    The euro hit a four-month high against the dollar after a
survey showed German analyst and investor sentiment rose for a
second straight month in June, suggesting Europe's largest
economy is on track for a modest recovery. 
    While many in markets see the U.S. central bank trimming its
asset purchases this year, most see higher overnight interest
rates as distant. Analysts say Federal Reserve chairman Ben
Bernanke, who will hold a news conference after a two-day policy
meeting ends on Wednesday, will try to soothe investor nerves.
    Uncertainty about the Fed has led to a sell-off in global
stocks in recent weeks, helping the safe-haven yen to its best
weekly gain in nearly four years against the dollar last week.
    "Even if they're considering tapering moving forward,
tapering isn't tightening. They're still going to be easing,
they're still going to be expanding their balance sheet. They
wouldn't be tightening until they start to shrink the balance
sheet," said Eric Viloria, currency strategist at Forex.com in
New York.
    A winding down of the central bank's $85 billion-a-month
bond purchase would boost the dollar, which has been hit by the
Fed's money-printing program over the past several years.
    "The yen's fresh leg lower today could be a sign that many
investors think the Fed will signal a reasonable chance of a
taper as later in the third quarter," said Joe Manimbo, senior
market analyst at Western Union Business Solutions in
    "The yen is seen vulnerable to less policy accommodation
from the Fed, a move that would tend to put upward pressure on
U.S. Treasury yields, burnishing the greenback's allure."
    The dollar rose 0.8 percent to 95.25 yen having hit a
two-month low of 93.78 yen on Thursday. A reported options
expiry at 95.35 yen could keep the pair close to that level.
    The euro rose 1 percent to 127.63 yen.
    Against the dollar, the euro rose 0.2 percent to $1.3398,
having reached a four-month high of $1.3415.
    The dollar index, which measures the greenback versus a
basket of currencies, slipped 0.2 percent to 80.657.
    Some investors think low inflation that is running below the
Fed's target of 2 percent potentially complicates the Fed's
ability to reduce bond purchases, lest the reduced stimulus
causes inflation to continue to fall.
    The U.S. Consumer Price Index edged 0.1 percent higher in
May, the government said on Tuesday, which was slightly weaker
than analysts polled by Reuters expected though price pressures
showed signs of stabilizing after a long decline. 
    Should the Fed reaffirm its commitment to the current pace
of bond-buying, the dollar could see some near-term weakness,
analysts said.
    But they said the yen's outlook may depend more on investor
sentiment for risk. Since Japanese Prime Minister Shinzo Abe
called late last year for radical monetary easing to revive the
economy, dollar/yen has been driven higher by rises in Japanese
share prices. 
    Worries China is slowing coupled with talk of a scaleback in
central bank liquidity led to a stock selloff and a sharp rise
in volatility. This drove investors to the yen which tends to
benefit in times of market turmoil. 
    One-month dollar/yen implied volatility jumped to two-year
highs and was last trading at around 15 percent.
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