NEW YORK (Reuters) - The dollar rallied against the yen on Wednesday, ending two days of declines and moving back towards a recent 2-1/2 year high, as positioning on expectations of easier Bank of Japan monetary policy led some investors to sell the Japanese currency.
Yen sentiment has been volatile as the BOJ January 21-22 policy meeting approaches, but traders said the dollar's pullback in the previous two sessions had lured investors waiting for a chance to buy on dips. Speculation that the BOJ could deliver further aggressive easing steps has capped any gains even when it did rally.
"Looking ahead to the BOJ later this month, investors are a little hesitant to bid the yen up too much higher," said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington. "The outlook for additional easing is keeping a lid on the yen to the upside."
The dollar rose 1 percent on the day to 87.90 yen, lifting off a near one-week low of 86.81 hit earlier in the session, using Reuters data. That low marked a loss of about 1.8 percent from last Friday's peak of 88.40 yen. The session peak was 87.97 yen, a two-day high.
Some US$2.8 billion in yen changed hands, according to Reuters Dealing.
Sources familiar with the BOJ's thinking said the central bank was likely to adopt a 2 percent inflation target at the meeting, double its current goal, and issue a statement with the government promising bold monetary easing steps.
The BOJ will also consider easing monetary policy again this month, probably through an increase in its 101 trillion yen ($1.2 trillion) asset buying and lending program, the sources said.
Expectations that Japan's newly elected government led by Prime Minister Shinzo Abe would push the BOJ to adopt more forceful monetary stimulus measures have driven the yen sharply lower in recent months. But the dollar and the euro eased against the yen this week as investors locked in profits after steep gains.
At Friday's peak, the dollar had gained nearly 12 percent against the yen since early November, and traders said the rally was due for a pause.
"After a 10-12 percent rise, there is bound to be some consolidation and a shakeout could possibly see dollar drop to 84 yen," said Howard Jones, partner at money manager RMG Wealth Management in London.
"But any consolidation will be short-lived. From a macro view, with a huge change of policy taking place in Japan and the government determined to drive the yen lower, one must not underestimate them. We are looking at the dollar hitting 100 yen during the course of this year."
On Wednesday, Abe repeated his call to the BOJ to take sufficient steps to achieve a 2 percent inflation target while Finance Minister Taro Aso called for aggressive measures to beat deflation.
The yen's weakness helped the euro, which rose 0.8 percent to 114.75 yen, but was still some way from an 18-month high set on January 2.
But the euro was 0.2 percent lower at $1.3049 ahead of a European Central Bank meeting on Thursday. While strategists suggest the ECB will keep its interest rates on hold on Thursday, some investors and economists believe rates will be cut later this year.
"The euro weakened to 1.3035 ahead of the European Central Bank interest rate decision and the single currency may continue to give back the rally carried over from the previous should President Mario Draghi talk up speculation for another rate cut," said David Song, Currency Analyst at DailyFX in New York.
Some US$3.6 billion in euros had changed hands through the global session on Wednesday, according to Reuters Dealing.
(Reporting By Nick Olivari; Editing by Grant McCool)
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