SINGAPORE (Reuters) - The dollar edged higher against the yen on Wednesday after its retreat this week from a 2-1/2 year high lured buyers who had been waiting for a chance to buy on dips, with the outlook for more Japanese monetary easing expected to weigh further on the yen.
The dollar was up 0.3 percent at 87.38 yen after having slipped to an intraday low near 86.83 yen, its lowest in nearly a week and a loss of about 1.9 percent from last Friday's peak of 88.48 yen, which was its highest since July 2010.
"In terms of the drop that we saw in dollar/yen, there were a lot of dollar buyers coming in," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
"So there do seem to be some dollar buyers out there who were looking for the dip in dollar/yen to pick it up," he said.
Traders also cited demand for dollars at the 0100 GMT Tokyo fixing, which is often a sign of dollar buying by Japanese importers.
Still, the risk of a further near-term pullback in the dollar cannot be ruled out, Credit Agricole's Kotecha said. Possible support for the dollar lies at 86.54 yen, its intraday low on January 2, and a breach of that level could open the way for a drop to around 85.90 yen, he added.
The euro rose about 0.3 percent to 114.19 yen, but was still some distance away from an 18-month high of 115.995 yen set on trading platform EBS on January 2.
The dollar and the euro had come under pressure against the yen earlier in the week as investors locked in profits in the wake of their steep gains versus the Japanese currency over the past couple of months.
At its peak against the yen on Friday, the dollar had gained nearly 12 percent from its trough in early November, and traders said the rally had been ready to pause for breath.
"Late last year, the yen sharply weakened in thin conditions. If you had to take a market position, could you see any reason to buy yen? No. So the yen was sold," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
"But markets can't keep moving for weeks on the same factors, even when the overall trend remains the same, so in the short term, the yen started moving up again."
Japan's new government led by Prime Minister Shinzo Abe is rushing this month to complete a new policy accord with the Bank of Japan and an economic stimulus package that will be the first test of whether he can deliver on his ambitious economic agenda aimed at pulling the country out of deflation.
Sources familiar with the BOJ's thinking said the central bank will likely adopt a 2 percent inflation target at its January 21-22 rate review, double its current goal, and issue a statement with the government pledging to pursue bold monetary easing steps.
The BOJ will also consider easing monetary policy again this month, with any easing likely to take the form of another increase in its 101 trillion yen ($1.2 trillion) asset buying and lending programme, the sources said.
The euro was nearly flat against the dollar from late U.S. levels, changing hands at $1.3075, with support at $1.30 holding after the European unit fell to a three-week low of $1.2998 on EBS on Friday.
The euro is likely to be supported this week by expectations the European Central Bank will hold off on cutting interest rates at its regular policy meeting on Thursday, though some investors and economists believe cuts will come later this year.
(Additional reporting by Lisa Twaronite in Tokyo; Editing by Edmund Klamann)
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