(Reuters) - The U.S. dollar fell against the euro on Tuesday after comments from Federal Reserve officials dented expectations the U.S. central bank may taper its bond purchases anytime soon.
But the dollar rose against the yen, a
day before the Bank of Japan concludes a two-day policy meeting. Traders widely
expect the yen to fall further on expectations Japan will continue its
aggressive monetary easing.
The euro rose 0.2 percent to $1.2906, having
reached a session peak of $1.2933 and moving away from a six-week low of $1.2795
touched on Friday, according to Reuters data.
Against the yen, the
dollar was up 0.2 percent at 102.48 yen , coming off a session peak of 102.88
Investors scrutinized Fed comments after speculation grew that it
is edging closer to tapering bond buying as the labor market improves. Focus now
shifts to Fed Chairman Ben Bernanke's testimony to Congress at 10 a.m. 1400 GMT)
St. Louis Federal Reserve Bank President James Bullard
told an event in Frankfurt the Fed should continue quantitative easing,
adjusting the pace of bond buying according to incoming data, and said U.S.
inflation has recently been below target.
New York Fed President William
Dudley said the economy's ability to weather lower government spending and
higher taxes in the coming months will be key to the Fed's decision on whether
to reduce bond purchases. Both are voting members of the Fed's policy-setting
"Our view remains that Bernanke will not favor near-term
'tapering' at tomorrow's testimony and he will not support 'tapering' before he
steps down as Fed Chair in January 2014," said Michael Woolfolk, senior currency
strategist at BNY Mellon in New York.
Analysts said if Bernanke
reiterates his ultra-loose monetary policy stance, the dollar could give back
some of its recent gains, but any suggestion of the Fed winding down asset
purchases later this year would give a huge boost to the dollar.
"Bernanke may not be that direct and therefore I would look for implicit
clues," said Paresh Upadhyaya, director of currency at Pioneer Investments in
Boston. For example, if Bernanke talks about the strength of the U.S. economy or
that policymakers are less concerned about the economy, markets may take that as
a sign the Fed is closer to an exit, analysts said.
Also on Wednesday,
the Fed will release the minutes of its April 30-May 1 policy setting meeting.
The yen had rallied from a 4-1/2-year low against the dollar on Monday
after Japanese Economy Minister Akira Amari suggested the yen's strength had
been largely corrected.
But on Tuesday, he said he hoped the yen settled
at a level justified by fundamentals and at which the impact on imports and
exports was balanced.
"It appears that Mr. Amari has been reprimanded by
Japanese policy leadership, not a small coincidence considering that the Bank of
Japan is meeting and will announce its latest measures, if any, tomorrow," said
Christopher Vecchio, currency analyst at DailyFX in New York.
which began a two-day meeting on Tuesday, is expected to keep policy unchanged
but could tinker with its bond-buying plan to curb a recent rise in Japanese
The dollar index, which measures the dollar against a basket of
other major currencies, rose 0.1 percent to 83.824, not far from Friday's peak
of 84.371, its highest since July 2010.
The index has gained 5 percent
so far this year on speculation the Fed may start winding down its stimulus
sooner than expected.
Some analysts said any near-term dollar weakness
would be temporary. The U.S. economy is growing while the euro zone is in
recession and the Bank of Japan is committed to flooding the market with
liquidity to boost Japanese inflation to 2 percent.
The euro reached a
four-month high against the Swiss franc on Tuesday at 1.2529 francs, according
to Reuters data, and was last up 0.5 percent at 1.2518 francs. The dollar rose
0.3 percent to 0.9699 franc.