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Dollar, Euro Gain on Yen as Dealers Discount Japanese Rate Cut

The dollar rose near two month-highs against the yen amid investors' expectations a possible rate hike by the Bank of Japan will fail to boost demand for the Japanese currency.

A sharp fall in crude oil futures also helped the dollar post gains against the euro and the Swiss franc, as analysts said it would likely help shrink the U.S. trade deficit and bolster consumer spending.

Japanese investors, returning to the market from a public holiday on Monday, initiated a fresh wave of selling on the perception that even a widely expected interest rate hike from the Bank of Japan next week will not counter the carry trade.

In a carry trade, investors sell low yielding currencies like the yen for popular high yielders such as the New Zealand dollar.

"What we were really watching today was Japanese investors coming back and selling the yen off again against the higher yielders," said Meg Browne, senior currency strategist at Brown Brothers Harriman.

The yen was the worst performer of the day, falling against all its G7 peers. The dollar was up , with the Japanese currency on course for its largest daily decline in almost a month.

Meanwhile, the euro and sterling were up against the yen.

The BOJ begins a two-day meeting on Jan. 17 to discuss monetary policy, when it may raise rates to 0.50% from 0.25%.

Elsewhere, the euro was down versus the dollar . The European currency has fallen against the dollar in three out of the past five trading sessions as a flurry of stronger U.S. economic data has subdued talk of a rate cut from the Federal Reserve in the first half of this year.

Analysts said strong economic data from Germany helped prevent the euro from sliding further, especially with the European Central Bank's next policy meeting looming on Thursday, which many believe will pave the way for a February rate hike.

The euro gained support from data that showed the German trade surplus hit a record high in November while the country's industrial output that month exceeded expectations.

Sterling rallied broadly after strong UK data rekindled speculation that British interest rates may rise further, although perhaps not as soon as this week, when the Bank of England meets to discuss policy.

The pound was up , having touched an intraday high at $1.9456, after firm data on British retail sales and employment buoyed sentiment ahead of a Bank of England policy meeting later this week.

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