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.
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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."