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The dollar steadied against the yen on Tuesday after getting a lift in the previous session as traders braced for the Federal Reserve to reiterate concerns about inflationary pressures at an upcoming policy meeting.
The dollar began the week on an upbeat note on Monday, rising around 0.5 percent against the yen and the euro as investors adjusted positions ahead of the Fed's two-day meeting ending on Wednesday.
With the central bank widely expected to keep interest rates unchanged at 5.25 percent for the third meeting in a row, the market is focusing on the Fed's post-meeting statement. Recent statements have acknowledged a cooling in the housing market while underlining a need to be watch for inflation risks.
"A change to this in tomorrow's statement could prompt some movement in currencies, but few in the market are expecting a significant new factor to come out of the meeting," said Kikuko Takeda, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.
The Fed said in a statement after its previous policy meeting on September 20 that "inflation pressures seem likely to moderate over time" as economic growth moderates. But it said "some inflation risks remain" and left open the possibility of further interest rate rises.
The dollar stood at 119.39 yen as of 0523 GMT, little changed from late US trading on Monday. The US currency has been supported this month by upbeat US data that reduced market expectations for a possible Fed rate cut early next year.
Few in the market expect the outcome of the meeting to knock the dollar/yen rate out of the 118-120 range it has been trading in for the better part of the month. The euro eased slightly to $1.2545 from around $1.2550 and was little changed at 149.70 yen.
Japanese Finance Minister Koji Omi reiterated the ministry's line on Tuesday that it would monitor currency rates carefully and take appropriate action as needed. The comments seemed to have a limited impact on the market.
The yen got a brief boost on Monday after Hiroshi Watanabe, Japan's vice minister for international affairs, said he did not expect further declines in the yen and that Japan's economy should stay on a solid recovery path.
But traders said the impact was relatively limited, since Watanabe also said he did not regard the current value of the yen as weak. The yen has slumped to its lowest level in more than two decades on a trade-weighted, inflation-adjusted basis.
Traders have been sensitive to official comments on the yen due to signs of irritation among European officials, who have said the yen - which hit a record low against the euro in late August - should reflect Japan's improving economic fundamentals.
Watanabe, speaking to reporters in New York, also said the volume of outstanding yen carry trades probably stood at "several trillion yen, not trillions of dollars", a small amount relative to the size of flows in the foreign exchange market.
The yen had risen last week after business daily Nihon Keizai reported that the BOJ plans to step up its monitoring of carry trades, in which investors borrow cheaply in yen and use the funds to invest in higher-yielding currencies. A BOJ spokesman later played down the report, saying the central bank has not specifically beefed up its monitoring of yen carry trades.

Copyright Reuters, 2006

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