The dollar hovered near a two-month high against the yen on Thursday as traders awaited an expected bump up in US interest rates and what signals the Federal Reserve will send about further tightening in August. The Fed concludes a two-day meeting later in the day and is widely seen lifting overnight rates for a 17th straight time to 5.25 percent from 5 percent.
"I think a 25 basis point rise seems to be a given but the bigger issue is what may happen after that," said a dealer at a European investment bank in Tokyo.
The key will be how the Fed plans to deal with concerns about inflation at a time when the US economy is showing signs of softness, traders and analysts said.
The market is keen to see if the Fed, in its post-meeting statement, tweaks the wording of the May statement that said further policy tightening may yet be needed to stem inflationary pressures but such action would depend on the economic outlook.
With expectations having increased in recent weeks for another rate rise in August, anything that suggests the Fed could hold off from hiking in August might spur selling of the dollar, analysts said.
"The wording itself may not change much but I think the statement will contain some nuance that shows a bias towards pausing from lifting interest rates," said Daisuke Uno, market strategist at Sumitomo Mitsui Banking Corp.
The dollar was nearly flat on the day at 116.45 yen, just below a two-month high of 116.71 yen marked on trading platform EBS earlier in the week. The euro was also little changed at $1.2550 and 146.15 yen. Dealers said the recent furore over Bank of Japan Governor Toshihiko Fukui's investment with a fund manager now indicted for insider trading continued to weigh on the yen.
Fukui came under fire again on Thursday when Kozo Yamamoto, head of a ruling Liberal Democratic Party panel on monetary policy, told Reuters that Fukui should resign "the earlier the better" over the affair. Yamamoto - one of the LDP's most vocal critics of the BoJ - stressed that his views were personal and that he had no plan to urge his LDP panel to call for Fukui's resignation. Japan's top government spokesman, Shinzo Abe, reiterated that the government wanted Fukui to stay in his job. Analysts believe that the BoJ will raise rates from near zero - possibly as early as next month - regardless of Fukui's fate.