The dollar fell on Wednesday, retreating from a near three-week high hit against the yen the previous day, after the Bank of Japan kept monetary policy unchanged despite slowing inflation. The greenback was also waning ahead of the release of US Federal Reserve minutes and the start of an earnings season that could show the negative impact of a strong currency, spreading caution about any rate hike in the world's largest economy.
Some had expected further easing from the BoJ. But Governor Haruhiko Kuroda said that thanks to easing steps taken last October, a slowdown in inflation had not hurt inflation expectations, reducing the chances of a further expansion in Japan's asset-buying programme in coming months.
As a result the yen climbed. The dollar shed 0.4 percent to 119.76 yen, pulling away from a near three-week high of 120.45 yen hit on Tuesday. The dollar index fell 0.4 percent to 97.416 after gaining 0.9 percent on Tuesday.
"It does not look like another round of quantitative easing from the BOJ is a done deal," said Petr Krpata, FX strategist at ING.
The minutes of the Federal Reserve's March meeting will be released later in the day and traders will scrutinise them for any concerns from policymakers about a strong dollar and its impact on US growth. Any unease from Fed policymakers about the dollar could see the greenback ease further.
Analysts said as US companies report first quarter earnings, starting with aluminium maker Alcoa after markets close on Wednesday, there will be close attention given to any evidence that a strong dollar is denting business.
"The earnings will be one of the key things we watch in terms of dollar direction," said Adam Cole, global head of FX strategy at RBC.
"If the strong dollar hits equities by the impact on corporate earnings, then they (the Fed) will be sensitive to that in terms of monetary policy."
Nevertheless, a drop in the dollar, especially against the yen, is likely to prove temporary given the diverging monetary policy outlook between the Fed on one hand and the BOJ and the European Central Bank on the other.
Japan finance ministry data on Wednesday showed Japanese investors were net buyers of foreign stocks and bonds for the third straight month in March. Their purchase of a net 4.311 trillion yen ($36 billion) in March was the highest in nearly five years.
Meanwhile, the euro nudged up 0.5 percent to $1.087 despite an unexpected drop in German industrial orders in February.
Sterling rose against other major currencies on talk of upcoming M&A deals expected to buoy demand for the British pound.
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