By Karen Brettell
NEW YORK (Reuters) – The dollar weakened against the yen on Monday ahead of the U.S. Federal Reserve’s meeting on Tuesday and Wednesday, and a Bank of Japan meeting on Friday.
The dollar had gained against major currencies in recent weeks as better-than-expected economic data revived expectations that the Fed would raise interest rates again this year.
Japanese and European central banks, by contrast, are seen as adopting more stimulative policies to stave off deflation and generate growth.
The Bank of Japan may, however, underwhelm investors this week as it faces dwindling options to reboot the country’s economy, analysts said.
“The risk is that the market’s disappointed in one fashion or another with the BOJ,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. “Expectations are strong enough that if they don’t do anything, the yen’s going to strengthen.”
The greenback weakened 0.24 percent to 105.81 yen
Bank of Japan Governor Haruhiko Kuroda said on Saturday he would ease policy further, if necessary, to achieve its 2 percent inflation goal.
Kuroda also shrugged off speculation that the BoJ would directly underwrite government debt, which is prohibited by law.
The Fed is seen as unlikely to raise interest rates on Wednesday, though investors will be looking for any signs that the U.S. central bank might be more likely to hike rates in coming months.
Improving economic data has increased expectations that the Fed will raise rates in December, after traders had entirely priced out the possibility of a rate hike this year.
Fed fund futures on Monday indicate traders see a 56 percent chance of a rate hike in December, up from 48 percent on Friday.
Any indication that the Fed may hike sooner than that could rattle investors.
“I would not expect them to close the door on a September rate hike because it’s data dependant and the data’s been stronger than expected,” Chandler said. “That could inject extra volatility in the markets.”
European bank stress tests on Friday also will be a focus, with investors concerned about potential capital shortfalls at Italian and Portuguese banks.
Italian lender Monte dei Paschi di Siena
(Editing by Bill Trott and Richard Chang)