The dollar rose against the yen for the first time in five trading sessions on Monday as stock markets gained worldwide, but range trading is likely to dominate until the Federal Reserve's policy announcement on Wednesday.
The U.S. currency briefly extended its gains after a report showed growth in the New York state manufacturing sector picked up in June, topping economist expectations.
Speculation the Fed will start winding down its stimulus program has led to a selloff in global equities, helping the yen post its best weekly gain in nearly four years against the dollar last week. The yen has exhibited a close inverse relationship with equities, especially Japanese shares.
Investors are hoping that Chairman Ben Bernanke will reassure markets that Fed policy will stay accommodative. Such comments could revive investor appetite for riskier assets and pressure the yen, analysts said. But they added that such a dovish stance by the Fed could see the dollar struggle to make meaningful gains.
"The dollar has been selling off over the last week or so, so I think it probably has more room to gain than to lose," said John Doyle, currency strategist at Tempus Inc in Washington. "That said, if he comes out and basically shoots down any idea of tapering back QE this year, then obviously the dollar is going to weaken on that news."