Speculation that the central bank will start tapering its asset-buying stimulus before the end of the year triggered a recent sell-off in global stocks and also market volatility which caused the dollar to lose ground to currencies like the safe-haven Japanese yen.

Analysts said the dollar and riskier assets could benefit if Fed Chairman Ben Bernanke manages to pacify nervous markets.

Fed policymakers will likely announce that they will continue to buy bonds at a monthly pace of $85 billion, while keeping their options open to scale back the program later this year if the U.S. labor market improves.

The Fed’s policy statement is due at 1800 GMT (2 p.m. EDT) with Bernanke’s news conference half an hour later.

“Markets are cautious ahead of Bernanke … a lot of the focus will be on the tapering discussion,” said Paul Robson, currency strategist at RBS.

Analysts said Bernanke could try to emphasize that tapering is not tightening and an actual rise in the funds rate is still a distant prospect.

“It is very much a balancing act for Bernanke. He would want to try and start weaning the markets off free and easy money… but equally it is about rate expectations for late 2014,” said Robson.

Against a basket of currencies, the dollar was flat at 80.60 .DXY, holding above a four-month low of 80.500 touched on Thursday.

The dollar was down 0.4 percent at 94.89 yen, staying above the 93.75 yen hit last Thursday, which was its lowest since April 4. Resistance was cited at 96.11 yen, which is the 23.6 percent Fibonacci retracement of the dollar’s fall to 93.75 yen on June 13 from 103.74 yen on May 22.

The dollar held steady against the euro at $1.3392 after the single currency touched a four-month high of $1.3416 on Tuesday. An options barrier was reported at $1.3450.

Growing anticipation that the Fed will pare its purchases also led to a sharp rise in longer-dated U.S. Treasury yields over the past six weeks.

Last month, the benchmark yield on 10-year U.S. notes jumped 46 basis points, its biggest one-month jump in nearly 2-1/2 years, according to Reuters data.

“I think the market just wants a united message: tapering or not?” said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo. “The uncertainty there has led to some excess volatility, which has led to people pulling out of some markets.”

(Additional reporting by Lisa Twaronite in TOKYO; editing by Stephen Nisbet)

Speculation Fed chief Ben Bernanke may indicate he could start winding down stimulus has led to a sell-off in global stocks in recent weeks, helping the safe-haven yen to its best weekly gain in nearly four years against the dollar last week.

Markets will be looking to Bernanke’s news conference on Wednesday after a two-day policy meeting for more clarity on the central bank’s stance.

While many in markets see the Fed trimming its asset purchases this year, most see higher interest rates as distant. FX analysts say Bernanke will try to soothe investor nerves and that this explains the dollar’s rise against the yen.

“Bernanke will try to downplay the tightening impact of tapering quantitative easing, which could help ease some of the concerns in the market… this could help dollar/yen head higher,” said Lee Hardman, currency economist at BTMU.

“If he doesn’t help dampen some of those investor fears about QE tapering then dollar/yen could slip.”

The dollar was up 1 percent at 95.40 yen having hit a two-month low of 93.75 yen on Thursday. A reported options expiry at 95.35 yen could keep the pair close to that level.

HSBC strategist Daragh Maher expects Bernanke to emphasize that any scaling back of Fed stimulus will depend on data. “While this should be generally dollar bullish, if volatility rises it could see dollar/yen lose ground.”

Since Japanese Prime Minister Shinzo Abe called late last year for radical monetary easing to revive the economy, dollar/yen has been driven higher by rises in Japanese share prices.

But worries China is slowing coupled with talk of the Fed withdrawing stimulus led to a stocks selloff and a sharp rise in volatility. This drove investors to the yen which tends to benefit in times of market turmoil.

One-month dollar/yen implied volatility jumped to two-year highs and was last trading at around 15 percent.

In a market preoccupied with the Fed outlook, U.S. consumer price data due at 8:30 a.m. ET was also in focus.

“Inflation has been somewhat lower than what the Fed would like… that is drawing concern among some FOMC members which potentially could see them arguing in favor of delaying tapering to a later point in time,” Hardman said.

The euro rose 0.1 percent at $1.3383. The single currency had earlier hit a four-month high of $1.3399, a hair’s breadth away from a reported options barrier at $1.3400.

The euro firmed after ZEW data showed German analyst and investor sentiment rose in June.

European Central Bank chief Mario Draghi said the bank was “ready to act” if needed, although recent signs of market stabilization meant monetary policy was proving effective.

(Additional reporting by Anirban Nag, editing by Nigel Stephenson)

The Japanese equity benchmark closed up around 2
percent, while European shares rose, breaking a
four-day losing streak.

The dollar-yen has been locked in step with the Nikkei in
recent weeks as investors unravel the sell-yen, buy-stocks trade
that dominated the market between November and May. A fall in
equities also forces investors to pare the dollar hedges
initially put in place to protect them from a weakening yen.

The dollar has lost close to 10 percent since May 22, when
it peaked at 103.74 yen.

The U.S. currency was down 0.4 percent at 95.00 yen,
but comfortably above a trough of 93.75 yen plumbed on Thursday
after a 6.4 percent slide in the Nikkei. A reported options
expiry at 95.00 yen could keep the pair pinned at that level.

Traders also cited Japanese exporter bids earlier in the day
as helping the dollar pare losses against the yen.

“We have seen a slight relief from recent volatility in the
markets this morning as equity markets are opening a bit higher
today,” said Commerzbank head of FX research Ulrich Leuchtmann.

But he said the dollar was unlikely to see considerable
gains against the Japanese currency, which tends to rise in
times of financial turmoil, until there was a bit more clarity
about central banks’ monetary policies.

“The risk-off (sentiment) we see is mainly due to markets
being unsure about the monetary policy of the future … this is
good reason to be cautious of risky assets and to look into safe
havens like the yen,” Leuchtmann said.

The current bout of market turbulence started when investors
began worrying that the Federal Reserve will start scaling back
its stimulus programme this year.

Winding the programme down early should help the dollar, as
the Fed’s bond-buying equates to printing money. But concerns
that a reduction in easy money could hurt risk sentiment has
driven equities lower and battered emerging currencies.

The Fed next meets on June 18-19, when markets will look to
chairman Ben Bernanke to make clear that the timing of stimulus
withdrawing will depend on economic data and give more details
about the central bank’s decision to ‘taper’ its bond-buying.

“For the coming week, markets should position for Bernanke
trying to assuage market fears,” said Alan Ruskin, strategist at
Deutsche Bank.

The dollar index was up 0.1 percent at 80.85,
recovering from a four-month low of 80.500 on Thursday after
upbeat U.S. data lifted global equities and supported the
dollar. But the dollar remained on track for its fourth
consecutive week of losses against a basket of currencies.

The euro has gained in recent days against the
struggling dollar, taking it to a four-month high of $1.3390 on
Thursday. But with sellers emerging on rallies, the euro was
last trading down 0.3 percent on the day at $1.3336.

The BOJ’s unprecedented measures had made it a one-way trade to buy Japanese equities and sell the yen.

But the Nikkei’s recent slide on doubts over Federal Reserve stimulus and Japan’s recovery has led foreign investors to unwind hedges taken out to benefit from rising stocks and avoid being hurt by a weaker yen.

The yen was up around 2 percent at 94.18 yen to the dollar, having risen to a peak of 93.75 after Japan’s Nikkei share index .N225 closed down 6.4 percent. Traders said the April 2 high of 92.57 yen was in sight.

Japanese equity futures, with which dollar/yen has been closely correlated in recent weeks, were also down around 2 percent, while European shares .FTEU3 traded lower.

Analysts said the yen, which rises in times of financial turmoil, was gaining on worries that the aggressive policies of Japanese Prime Minister Shinzo Abe were yet to boost the economy and stave off deflation.

“The drop in the Nikkei can be attributed to a combination of factors … there has been some degree of the gloss coming off the Japanese government’s ability to stimulate growth,” said Jane Foley, senior currency strategist at Rabobank.

Foley said there was a chance that Japanese authorities might verbally intervene if the yen strengthened much further.

Strategists also said the yen has been supported as market participants shun risky assets on concerns the U.S. Federal Reserve might slow the pace of its asset purchase program.

Reflecting uncertainty about near-term direction, dollar/yen one-month implied volatility jumped to its highest in more than two years.

In a bearish signal, the dollar fell below the base of its daily Ichimoku cloud, a closely watched chart indicator. A close below the cloud has not happened since mid-October, when the dollar traded around 78 yen.

“This is a fast market and 92.60 (in dollar/yen) is a possibility. But I expect we will see stabilizing action by the Japanese next week,” said Hans Redeker, head of Global FX strategy at Morgan Stanley.

Market participants slashed hefty bets on gains in the dollar, which had been taken out on expectations the Fed would soon scale back monetary easing. <IMM/FX>

The dollar lost 0.25 percent against a basket of currencies .DXY and was last at 80.75, not far from a nearly-four-month low of 80.50 hit earlier in the day.

The euro hit a near four-month peak of $1.3390. But traders reported offers at $1.3400 and the euro trimmed gains to trade flat at $1.3330.

The euro was down 2 percent at 125.65 yen, having fallen to 125.49 yen, its lowest since April 16.

(Additional reporting by Jessica Mortimer; Editing by Catherine Evans)

Market expectations that the Fed was contemplating turning
off its stimulus taps had kept the dollar well bid recently.
Quantitative easing tends to hurt a currency as it increases its
supply.

But with U.S. economic data providing only tentative signs
of a recovery, strategists said it was looking increasing
unlikely the central bank will start cutting back the support it
has provided markets through purchases of Treasuries and
mortgage-backed securities.

“The dollar has been hurt by uncertainties about the timing
of the reduction of Fed QE… U.S. data has not been supportive
for an early reduction,” said Niels Christensen, FX strategist
at Nordea.

Christensen said this has helped the euro break through the
upper end of the $1.28-1.32 range it has been stuck in over the
last few months.

The euro, however, remained vulnerable to losses against the
dollar as some market participants were not wholly convinced of
the Fed remaining accommodative and hence picked up the dollar
at lower levels.

The euro was last down 0.2 percent at $1.3288, having
hit a peak of $1.3335, its highest level since Feb 20.
Resistance was cited at $1.3340, the 61.8 percent Fibonacci
retracement of the high in February to the low in April.

Strategists said falls in commodity and emerging market
currencies also triggered a return to the euro.

The faltering dollar, however, regained footing against the
yen after seeing its worst daily performance in more than three
years on Tuesday. Market participants unwound their bets against
the yen when as the Bank of Japan held off from introducing
fresh steps to curb bond market volatility.

The dollar bounced 0.8 percent to 96.70 yen after
sinking as low as 95.60 in the previous session and closing down
2.7 percent to chalk up its biggest one-day fall since May 2010.

Analysts say technical support may keep dollar-yen above 95
for now. A reported large option expiry at 97.00 yen could keep
the currency pinned to that level.

The euro followed a similar trajectory, reclaiming 0.6
percent to 128.50 yen after losing 2.4 percent to
approach its two-month low of 126.19 struck on Friday.

Yen shorts were squeezed after the BOJ disappointed
investors hoping for an extension in the maximum duration of its
fixed-rate loans to try and quell volatility in the bond market.

“I think 60 percent of the market were expecting something
out of the BOJ. Then overseas stocks sold off and I think the
risk-off atmosphere helped the yen’s gain,” said Kenichi Asada,
manager of forex at Trust & Custody Services Bank.

Strategists said falls in the dollar against the yen were
still viewed as opportunities to buy the pair and overall the
dollar will trade higher to cross the 100 yen mark later this
year.

The dollar found support after Japanese equities .N225 closed almost 5 percent up on the day while European shares stabilized to last trade flat .FTEU3.

Prospects of the Federal Reserve scaling back its stimulus in coming months could also continue to help the dollar, but strategists said in the near-term the lack of clarity on when this would happen could lead to some volatility in the currency.

The dollar was up 1.34 percent at 98.83 yen, around 4.0 percent above Friday’s trough of 94.98 yen, which marked its lowest since the Bank of Japan unveiled aggressive monetary easing on April 4. Traders reported offers up to 99.50 yen but bids around 98.00 yen.

The dollar saw its worst weekly performance against the yen since mid-2010 last week, but strategists said further losses would be limited as dips in the pair were still considered good buying opportunities.

“Last week with elevated nerves about what Fed tapering means and when it could start, we saw this knee-jerk rush to safe heavens, like the yen,” said Sara Yates, global head of FX strategy at JP Morgan Private Bank. “I think what we are seeing at the moment in the market is the unwinding of that.”

Yates said while in the near-term there was scope for more volatility in dollar/yen, the dollar is forecast to rise to 105 yen in 12 months, given the BoJ’s aggressive stimulus plan and as talk about how and when the Fed may slow its pace of asset purchases gains momentum.

The dollar recovered from heavy losses against the yen after data on Friday showed that U.S. employers had added a slightly above-forecast 175,000 jobs in May.

But analysts said this did not point to a sustained recovery in the economy and the dollar remained vulnerable to weak U.S. data.

“(The jobs data) hasn’t changed the market’s view much on the timing of Fed tapering,” said Kasper Kirkegaard, currency strategist at Danske Bank, adding that the dollar was likely to react more to weaker than stronger U.S. data because the market still held hefty bets of dollar gains. <IMM/FX>

The dollar was also boosted by an upward revision to Japanese first quarter economic growth. This lifted Japanese equities .N225, which typically causes the yen to fall.

Markets will focus on the BOJ’s two-day policy meeting, that ends on Tuesday, for Governor Haruhiko Kuroda to address the recent market volatility, but analysts said it was unlikely the central bank will announce any decisive measures.

“Markets will be looking for details from Kuroda but the risk is that those details won’t be forthcoming and that can see the yen strengthen a little bit and dollar/yen get buffeted around a bit,” said Yates.

The euro was flat at $1.3212 against the dollar and up 1.21 percent against the yen at 130.57 yen.

(Additional reporting by Jessica Mortimer; editing by Ron Askew)

While this outcome was widely expected, the euro inched
higher as some market participants had been building positions
against it on the outside chance that the ECB could cut its
record low refi rates from the present 0.50 percent
or take its deposit rate to below zero.

The euro rose 0.2 percent to $1.3123, close to
$1.3131 hit earlier in the day which was its highest level since
May 9. Immediate resistance is seen around $1.3140, the 76.4
percent retracement of its May 1-17 fall with stop-loss buy
orders above $1.3150.

While latest euro zone business surveys showed some signs of
stabilisation in the economy and likely gave the ECB room to
hold off lowering rates in June, strategists said the euro would
be unable to make any significant gains as there was still scope
the ECB could hint at easing policy in coming months.

For this, markets would focus on ECB president Mario
Draghi’s press conference at 1230 GMT.

“The ECB keeping rates on hold was a small positive for the
euro… the uptick in survey data is probably enough for Draghi
to sound a little bit more upbeat, however, he has to be careful
not to step too far away from his recent rhetoric around the
deposit rate,” said Paul Robson, currency strategist at RBS.

“If the market gets the sense that that is completely off
the agenda, the euro will rally and that will be an unwelcome
tightening in monetary conditions.”

Analysts said any gains in the euro would be capped as
market participants still look to sell the euro on any rallies.

“We think Draghi will try and talk down the euro and hence
see any bounce to $1.32 as a selling opportunity,” said Peter
Kinsella, currency strategist at Commerzbank.

The euro’s rise dragged the dollar index which was
last down 0.3 percent at 82.384, not far from a four-week low of
82.351 hit earlier in the day.

The dollar was flat against the yen at 99.10 yen, having
struck a four-week low of 98.83 yen earlier in the
session. The U.S. currency had lost 1 percent against the yen a
day earlier.

Dollar-yen has been tracking the Nikkei stock average
over its steep decline in the past two weeks, as foreign
investors wind back the hedges they had put on for protection
from the yen’s slide between November and May.

“The shaky price action in the Nikkie is probably concerning
people that are holding long dollar-yen positions,” RBS’ Robson
said, adding that the next focus would be 98.80 yen and if that
was breached 97 yen would be the near-term target.

The dollar’s falls on Wednesday were intensified after a
closely watched report showed hiring by U.S. firms was sluggish
in May. That raised the risk that Friday’s non-farm payrolls
could disappoint and lessen the likelihood that the Federal
Reserve will taper its easing programme early.

While this outcome was widely expected, the euro inched higher as some market participants had been building positions against it on the outside chance that the ECB could cut its record low refi rates from the present 0.50 percent or take its deposit rate to below zero.

The euro rose 0.2 percent to $1.3123, close to $1.3131 hit earlier in the day which was its highest level since May 9. Immediate resistance is seen around $1.3140, the 76.4 percent retracement of its May 1-17 fall with stop-loss buy orders above $1.3150.

While latest euro zone business surveys showed some signs of stabilization in the economy and likely gave the ECB room to hold off lowering rates in June, strategists said the euro would be unable to make any significant gains as there was still scope the ECB could hint at easing policy in coming months.

For this, markets would focus on ECB president Mario Draghi’s press conference at 8:30 a.m. ET.

“The ECB keeping rates on hold was a small positive for the euro… the uptick in survey data is probably enough for Draghi to sound a little bit more upbeat, however, he has to be careful not to step too far away from his recent rhetoric around the deposit rate,” said Paul Robson, currency strategist at RBS.

“If the market gets the sense that that is completely off the agenda, the euro will rally and that will be an unwelcome tightening in monetary conditions.”

Analysts said any gains in the euro would be capped as market participants still look to sell the euro on any rallies.

“We think Draghi will try and talk down the euro and hence see any bounce to $1.32 as a selling opportunity,” said Peter Kinsella, currency strategist at Commerzbank.

The euro’s rise dragged the dollar index .DXY which was last down 0.3 percent at 82.384, not far from a four-week low of 82.351 hit earlier in the day.

The dollar was flat against the yen at 99.10 yen, having struck a four-week low of 98.83 yen earlier in the session. The U.S. currency had lost 1 percent against the yen a day earlier.

Dollar-yen has been tracking the Nikkei stock average .N225 over its steep decline in the past two weeks, as foreign investors wind back the hedges they had put on for protection from the yen’s slide between November and May.

“The shaky price action in the Nikkie is probably concerning people that are holding long dollar-yen positions,” RBS’ Robson said, adding that the next focus would be 98.80 yen and if that was breached 97 yen would be the near-term target.

The dollar’s falls on Wednesday were intensified after a closely watched report showed hiring by U.S. firms was sluggish in May. That raised the risk that Friday’s non-farm payrolls could disappoint and lessen the likelihood that the Federal Reserve will taper its easing program early.

(Additional reporting by Anirban Nag; Editing by Ron Askew)