The dollar held near a one-month high against the yen on Tuesday as expectations for an aggressive interest rate cut later in the day by the Federal Reserve waned following solid US economic data. The Fed is widely seen cutting overnight rates by a quarter percentage point to 4.25 percent and stating its commitment to pumping funds into the strained banking system towards the end of the year.
Data released in the last few sessions, including an as-expected increase in employment and surprising rise in pending home sales, eased some fears of an imminent US recession. Investor risk appetite also improved on news that financial institutions, battered by their exposure to subprime mortgage defaults, were getting capital from investors in Asia and the Middle East.
Traders said the dollar's gains against the yen are seen limited as many in the market believe the Fed may have to trim interest rates more to calm credit markets completely even after Tuesday's expected rate cut. Traders said the dollar was likely to hold steady before the Fed decision, as the recovery in risk appetite was likely to benefit high-yielding currencies such as the euro, Australian dollar and sterling at the expense of the low-yielding yen. The dollar was up 0.1 percent to 111.75 yen after rising to a one-month high around 111.95 yen, moving further away from a 2-1/2-year low of 107.22 yen hit last month.
The euro edged up 0.1 percent to $1.4725 rising from a three-week low of $1.4525 hit last week after European Central Bank President Jean-Claude Trichet appeared to leave open the possibility of higher interest rates next year.
The euro was up 0.2 percent against the yen at 164.60 yen. The Australian dollar was up 0.4 percent against the yen at 99.19 while the New Zealand dollar was up 0.3 percent against the Japanese unit to 87.42 Traders continued to keep an eye on US data including retail sales and quarterly earnings reports from big US investment banks for clues on the damage from the credit crunch.
The dollar dipped on Monday after Swiss bank UBS announced $10 billion in subprime write-downs and said it had obtained a capital injection from a Singapore government entity and an unnamed Middle East investor. "The dollar may be steady vs the yen thanks to cross/yen buying, but its general trend remains downward as players eye yield differences," said a senior dealer.
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