TOKYO - The dollar firmed in Asian trade on Tuesday, as traders braced for the outcome of the U.S. Federal Reserve's two-day policy meeting that takes place amid the backdrop of a looming crisis in Greece.
The greenback briefly spiked to a session high of 123.81 yen immediately after Bank of Japan Governor Haruhiko Kuroda said he was not making any assessment on nominal yen levels or predicting its future moves in his comments to parliament last week.
"I didn't say I do not want a weak yen," Kuroda said on Tuesday.
The dollar quickly pared its gains, and was last up about 0.2 percent on the day at 123.58 yen, well shy of a 13-year high of 125.86 yen hit earlier this month.
"Markets saw 'Kuroda' in the headline and reacted, but then he didn't say anything," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.
"Still, there have been some interesting but valid comments over the past couple of weeks, about the downside of yen weakness," Wakabayashi said.
Last Wednesday, the yen jumped 2 yen against the dollar after Kuroda told parliament that the Japanese currency was unlikely to fall further on a real effective exchange rate basis as it was already "very weak."
Expectations of monetary policy divergence continue to favour the dollar over the yen. The Bank of Japan remains on course to expand its monetary stimulus in October, according to the most recent Reuters poll of economists.
In contrast, a bright U.S. employment report last month as well as an uptick in wage inflation have heightened speculation that the Fed may begin raising interest rates as early as September. Investors will look for timing clues in Fed Chair Janet Yellen's post-meeting news conference on Wednesday.
However, a hawkish U.S. policy statement is far from a given. U.S. data overnight showed that industrial production unexpectedly fell in May as manufacturing and mining activity remained weak, a sign that a strong dollar continued to constrain economic growth.
"While we also believe that the Fed will lay the foundation for tightening, it would be remiss to not discuss the downside risks for the dollar," Kathy Lien, managing director of FX strategy for BK Asset Management, wrote in a note to clients.
The dollar's rapid gains over the past few weeks give the U.S. central bank some leeway to be flexible, she said, and policymakers could opt to remain cautious in light of the fact that both the International Monetary Fund and World Bank have said they believe the Fed should delay hiking rates until 2016.
If they chose to deliver it, a "dovish message would be a big surprise that could send the greenback tumbling as much as 2 percent this week," Lien said.
The euro edged down about 0.1 percent on the day to $1.1275 . Against the Japanese currency, the euro inched up about 0.1 percent to 139.32 yen, as investors wavered between hope and despair over Athens' inability so far to reach a deal with its lenders to avert a default.
Greece and its creditors hardened their stances on Monday after the collapse of weekend talks, prompting Germany's EU commissioner to say the time had come to prepare for a "state of emergency".
The euro zone finance ministers' meeting on Thursday now takes on a greater role for potentially breaking the deadlock, as Greece faces a 1.6 billion euro repayment to the IMF at the end of this month.
But Greek Finance Minister Yanis Varoufakis said in a German newspaper interview that he is not planning to present new reform proposals at a Eurogroup meeting later this week, according to interview excerpts published on Tuesday.
Greece's government denied a German newspaper report on a euro zone plan that involves Athens imposing capital controls this weekend if it fails to reach a deal with creditors this week, a government official told Reuters on Monday.
The Australian dollar fell about 0.1 percent against its U.S. counterpart to $0.7758 but was mostly resilient despite Reserve Bank of Australia's repeated plea for a weaker currency in the minutes of its June meeting.
The RBA said a further drop in the Aussie is "both likely and necessary", particularly given the significant falls in commodity prices over the past year. - Reuters