Yen Slips as Fed Reassurance Is Sought

Sha Ying | CNBC

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."

The dollar rose 0.5 percent to 94.96 yen, with the session peak at 95.21 yen, helped by gains in the Nikkei share average. U.S. and European stocks also climbed. It had earlier hit a session low of 94.08 yen, not far from a two-month low of 93.78 yen set on Thursday. Support is seen at 93.57, the 38.2 percent retracement of its September-May rally.

(Read More: Fed in Driving Seat for Asian Markets This Week)

Higher-yielding assets have also been the victim of disappointment over Japan's lack of new policy moves and uncertainty about the Fed. Those factors have led to wild swings in Tokyo shares and forced investors to unwind short yen positions in recent weeks.

"It's a bit difficult to call what Bernanke will say, but our best-case scenario is he will try to soothe bond market volatility, and that should help dollar/yen," said Tom Levinson, currency strategist at ING. "If he is able to do that, dollar/yen should be able to find a base at 93.50 yen."

And with the Fed chief likely to reiterate that the U.S. economy will continue to grow, prospects for the dollar in the medium term appear to be bright, analysts said.

"Fundamentally, the U.S. economic acceleration this summer and the Fed's first steps towards the exit in third-quarter 2013 should lift the dollar through the second half of the year. We see dollar/yen at 110 yen and euro/dollar at $1.20 by year end," Societe Generale said in a note.

The yen also weakened against other major currencies, with the euro rising 0.6 percent to 126.30 yen, still within sight of a two-month trough of 124.95 hit last week. The Australian dollar gained 0.6 percent and the Canadian dollar rose 0.8 percent.

(Read More: A Silver Lining for the Volatile Nikkei)

Over the medium term, with the Fed chief likely to reiterate that the U.S. economy will continue to grow, prospects for the dollar appear to be bright, analysts said.

"Fundamentally, the U.S. economic acceleration this summer and the Fed's first steps towards the exit in third-quarter 2013 should lift the dollar through the second half of the year. We see dollar/yen at 110 yen and euro/dollar at $1.20 by year end," Societe Generale said in a note on Monday.

The euro reversed losses late in the New York session and climbed 0.2 percent to $1.3373 with the session peak at $1.3379, not far off a 3 1/2-month high of $1.3390 set on Thursday. Analysts said the move reflected positioning ahead of Wednesday's Fed meeting.