Safe-haven yen gains in cautious mood ahead of Fed

[October 27, 2015] By Jemima Kelly

LONDON (Reuters) - The safe-haven yen gained on Tuesday, hitting a seven-week high against the euro, as investors turned risk-averse before the start of a two-day meeting of the U.S. Federal Reserve.

Markets are pricing in only around a 7 percent chance of a U.S. rate hike this week, but they will be watching Fed Chair Janet Yellen closely for any clues to whether "lift-off" could come at its next meeting in December.

The yen had fallen last week, hitting a two-month low against the dollar after the European Central Bank said it was ready to loosen policy further and China cut interest rates again, fuelling speculation that the Bank of Japan could signal more easing at its meeting on Friday.

But the currency strengthened on Monday after a key Japanese government adviser said the BoJ could wait for more easing because the job market remained tight. It was further supported on Tuesday by a risk-off move that saw equities and other riskier assets such as commodities moving lower.
 

The euro fell 0.6 percent to 133.03 yen , its weakest since early September. The dollar also fell 0.6 percent to 120.43 yen, having hit 121.60 on Friday.

HSBC currency strategist Dominic Bunning in London said markets were in a "holding pattern" ahead of the Fed and BoJ, and that the current risk-off sentiment would not last.

"Classic risk assets are all slightly softer but it's not been an aggressive move," he said. "I don't think the positioning is there to see these massive spikes in emerging market selling and related safe-haven strength because I think a lot of the positioning has been cleared out in those markets."

The main focus for currency traders in the European session was UK growth data due at 0930 GMT which, if robust, could see expectations for the first Bank of England rate hike since the financial crisis brought forward, boosting sterling.

Against the dollar, the euro edged down 0.1 percent to $1.1050, having fallen over 2 percent since ECB chief Mario Draghi's news conference last Thursday. It was given little support by a slightly-better-than-expected German business confidence survey on Monday.

"Draghi blamed the euro appreciation of the last few months for the disappointing trend in inflation," wrote Commerzbank strategists in a research note.

"That means that the euro is unlikely to appreciate despite favorable economic news -- the ECB will make sure that it doesn't."

(Additional reporting by Lisa Twaronite in Tokyo; Editing by Catherine Evans)
 

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