Yen clings to sharp gains after suspected intervention, Fed in focus

The yen held its line against the dollar on Tuesday after making sharp gains the previous day in moves that traders said were sparked by suspected intervention by Japanese authorities. The Japanese currency was trading a touch lower 0.16 per cent at 156.56 per dollar, but was well off its 34-year low of 160.245 hit on Monday when traders say yen-buying intervention by Tokyo drove a sizeable rebound of nearly six yen.

Japanese authorities haven't confirmed that they had stepped into the currency market in support of the yen, but markets remain on heightened intervention alert ahead of the Federal Reserve's monetary policy review this week.

Japan's top currency diplomat Masato Kanda said on Tuesday that authorities were ready to deal with foreign exchange matters "24 hours", but declined again to comment on whether the finance ministry had intervened.

"There is clearly a possibility that the sharp and sudden lifts in the JPY were sparked by intervention. But the reality is no one knows for sure if the MOF did step into the FX markets yesterday," said Carol Kong, a currency strategist at the Commonwealth Bank of Australia.

Trading in Asia was thinner than normal on Monday due to Japan's Golden Week holiday as the yen saw its biggest one-day gain this year on the dollar. Official figures that would reveal whether intervention did in fact occur won't be available until late May. Markets in Japan will be closed again on Friday for the holiday.

The Japanese currency still sits lower than it was before the Bank of Japan's policy announcement last week. That could bode ill for the yen as the Fed begins its two-day monetary policy meeting on Tuesday, where it's expected to holds rates at 5.25 per cent-5.5 per cent, with U.S. inflation proving to be sticky. The Fed is expected to strike a hawkish message, meaning more yen selling is likely, CBA's Kong said.

"The implication is the MOF will likely be forced to step in more than once to slow the rise in USD/JPY." The BOJ's go-slow approach on interest rate increases, following its landmark decision to ditch negative rates in March, has traders betting that Japanese bond yields will remain low for an extended period. In contrast, U.S. rates are still relatively high and provide enough latitude for yen bears.

A fragile economic recovery is also likely to constrain BOJ's options as any over-tightening in policy could tip Japan into recession. Data showed Japan's factory output rose at a better than expected 3.8 per cent pace in March from the previous month, though retail sales for the same month undershot market forecasts.

The dollar consolidated around 105.73 against a basket of currencies ahead of the Fed's meeting, after slipping 0.25 per cent in the previous session. Traders have continued to pare back bets of Fed rate cuts this year amid the hotter-than-expected U.S. economic data and stubborn inflation numbers.

A rate cut in September was looking like a close call at just 44 per cent, according to CME Group's FedWatch tool. However, other major central banks such as the European Central Bank (ECB) and the Bank of England may begin to cut rates in the near future.

Markets could glean more clues on the timing of ECB's rate-easing cycle from European inflation data this week due later on Tuesday. The euro was down 0.05 per cent at $1.0714. Sterling was last trading at $1.2558, little changed on the day.