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Dollar Rises vs Yen on Bets That Fed Is Ready to Move

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The U.S. dollar rose for a second day against the yen on Tuesday as some traders bet the Federal Reserve may signal it is almost ready to reduce its bond buying program aimed at propping up the economy.

But while many in markets see the U.S. central bank trimming its asset purchases this year, most see higher overnight interest rates as distant.

Analysts say Federal Reserve chairman Ben Bernanke will try to soothe investor nerves after a two-day policy meeting ends on Wednesday and that explains the dollar's rise against the yen. Uncertainty about the Fed has led to a sell-off in global stocks in recent weeks, helping the safe-haven yen to its best weekly gain in nearly four years against the dollar last week.

(Read More: Dow Jumps 100, All S&P Sectors Higher)

A winding down of the central bank's $85 billion-a-month bond purchase would boost the dollar, which has been hit by the Fed's money-printing program over the past several years. "The yen's fresh leg lower today could be a sign that many investors think the Fed will signal a reasonable chance of a taper as later in the third quarter," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"The yen is seen vulnerable to less policy accommodation from the Fed, a move that would tend to put upward pressure on U.S. Treasury yields, burnishing the greenback's allure."

The dollar rose 0.8 percent to 95.27 yen having hit a two-month low of 93.78 yen on Thursday. A reported options expiry at 95.35 yen could keep the pair close to that level.

The Fed concludes its two-day policy meeting on Wednesday and Bernanke will hold a press conference after the meeting.

"Bernanke will try to downplay the tightening impact of tapering quantitative easing, which could help ease some of the concerns in the market... this could help dollar/yen head higher," said Lee Hardman, currency economist at BTMU in London.

(Read More: Markets More Doubtful of Fed Easing Benefits: CNBC Survey)

Since Japanese Prime Minister Shinzo Abe called late last year for radical monetary easing to revive the economy, dollar/yen has been driven higher by rises in Japanese share prices. But worries China is slowing coupled with talk of the Fed withdrawing stimulus led to a stocks selloff and a sharp rise in volatility.

This drove investors to the yen which tends to benefit in times of market turmoil. One-month dollar/yen implied volatility jumped to two-year highs and was last trading at around 15 percent.

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The euro rose 1.0 percent to 127.66 yen. Against the dollar, the euro rose 0.2 percent to $1.3397, having reached a four-month high of $1.3398 after ZEW data showed German analyst and investor sentiment rose in June.

European Central Bank chief Mario Draghi said the bank was "ready to act" if needed, although recent signs of market stabilization meant monetary policy was proving effective.

(Read More: Fed Meets as Faith in Its Bond Purchases Wanes)

The dollar briefly hit a session peak versus the yen, while the euro extended gains after data showed U.S. consumer prices rose in May and a gauge of underlying price pressures showed signs of stabilizing after a long decline, a potential comfort to Federal Reserve policymakers who would like to see stronger inflation.

Other data showed an increase in groundbreaking at home construction site. The dollar index, which measures the greenback versus a basket of currencies, slipped 0.2 percent to 80.65.

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