Yen up as US$ faces expectations for a dovish Fed

London

THE Japanese yen rose on Tuesday, benefiting from a US dollar hit by concern over the US economy and expectations that the Federal Reserve will prove accommodative at a meeting this week.

The euro also profited from the weaker dollar, adding 0.2 per cent to US$1.1348.

Markets expect the Fed to strike a dovish tone when it meets, and bets on an interest rate cut have increased after weaker-than-expected manufacturing data on Friday.

The US currency, measured against a basket of rivals, has weakened 1.3 per cent in the last 10 days.

On Tuesday, it fell 0.2 per cent to 96.415.

The foreign exchange market has traded in a narrow range this week as caution prevails among investors ahead of the Fed meeting but the Japanese yen, Monday's worst performing major currency, has recovered.

The Australian dollar has gained the most from the US dollar's retreat though it was hit by Reserve Bank of Australia minutes that expressed concern about the housing market.

The New Zealand and Canadian dollar are also performing well.

"Assuming Washington does not turn more aggressive on trade in the near future, expect this more benign environment to continue and to allow local stories to win through ... ," ING analysts said.

Volatility in foreign exchange markets is at its lowest in five years and analysts say recent decisions by the Fed and other major central banks is contributing.

The broader theme for foreign exchange markets in recent days has been oil, with the Mexican peso and the Russian rouble - both outperforming oil exporters - among the best performing currencies.

The Norwegian kroner is a notable exception in that regard as bullish bets are being trimmed ahead of Thursday's Norges Bank meeting.

Sterling gained, rising 0.4 per cent to US$1.3311.

It had fallen overnight after the speaker of Britain's parliament upended Prime Minister Theresa May's Brexit plans by ruling that she had to change her twice-defeated deal before offering it for a third vote.

The Bank of England is expected to leave its interest rate outlook unchanged at a policy meeting on Thursday because of the uncertainty over Britain's decision to leave the European Union. REUTERS