Currency gains ahead of BOJ, as dollar slips after Fed comments

The yen gained on Thursday on speculation that the Bank of Japan won't deliver radical stimulus this week, while the dollar took a step back after the U.S. Federal Reserve stopped short of signalling a near-term rate rise.

"It seems the market is preparing for disappointment already" on the scope of BOJ moves, said Bart Wakabayashi, head of Hong Kong FX sales at State Street Global Markets in Tokyo.

"Maybe players are getting too short dollar/yen ahead of this and we may see a reaction higher regardless of the outcome," he said. "There's a possibility for a contrarian to have a good day on all of this."

Japan's prime minister unveiled a surprisingly large $265 billion stimulus package on Wednesday, adding pressure on the central bank to match the measures with monetary stimulus steps.

"I think (BOJ Governor Haruhiko) Kuroda understands that the world is watching" the central bank's policy response, Economy Minister Nobuteru Ishihara was quoted as saying by Japanese media hours after the government's stimulus announcement.

Yen moves and political considerations could be decisive factors for the BOJ, which would prefer to conserve its policy resources in case the Japanese economy takes a turn for the worse.

As investors digest the details of what the central bank does, or refrains from doing, strategists say the yen could be in for volatile trading on Friday, and the dollar might even test the 2 1/2-year low of 99 yen it plumbed in the wake of Britain's vote to exit the European Union.

"Investors will be closely watching not just the statement, but Kuroda's press conference after the meeting ends, for clues to future policy," said Kumiko Ishikawa, senior FX analyst at Gaitame.Com Research Institute in Tokyo.

A Citi survey of its clients and financial institutions earlier this month showed 80 percent expected the dollar to fall more than 3 percent against the yen if the BOJ stands pat on Friday and does not signal any action in September. More than 30 percent think the drop would be more than 4 percent.

The Fed, meanwhile, said on Wednesday after its two-day policy meeting that it was less worried about possible shocks to the U.S. economy, suggesting that a hike as early as September was not out of the question.

"Near-term risks to the economic outlook have diminished," Fed policymakers said.

But the central bank's improved mood wasn't enough to cement expectations that it was gearing up to raise interest rates anytime soon.

"If the U.S. economy continues to grow despite the increased headwinds, slack in the labour market will diminish, and we expect the Fed to squeeze in one rate hike before the end of the year, most likely in December," strategists at Rabobank wrote.

"However, a December call also means that we think that the risk of the FOMC not hiking at all in 2016 is substantial," they said.

The dollar index, which tracks the U.S. unit against a basket of six major rivals, slipped 0.5 percent to 96.589 , moving away from its overnight high of 97.530. Earlier this week, it had risen as high as 97.569, its highest level since March.

The euro edged 0.1 percent higher to $1.1073

The Australian dollar was up 0.4 percent at $0.7519 , taking back some lost ground after falling in the previous session as a subdued inflation report left the door open for an interest rate cut next week.

The Reserve Bank of Australia will hold its monthly policy review on Aug. 2.