Another Japanese trade deficit pulled the yen down against the dollar and the euro on Wednesday, but that was only a minor distraction for anxious investors waiting to see whether the U.S. Federal Reserve will opt to reduce its stimulus at its policy meeting later in the session. The Fed's asset purchases have been a major force that has simultaneously underpinned riskier global assets and capped the dollar in recent years. The Fed will announce its policy decision at 1900 GMT and Chairman Ben Bernanke will hold a news conference at 1930 GMT. Economists at Citigroup see an even chance of the Fed announcing a reduction at this meeting, and believe it is very likely that actual cutbacks in asset purchases will begin either next month or following the January meeting. They believe the U.S. central bank will end its quantitative easing in the third quarter of 2014. "Our bias, a small dovish taper, may soon turn into a risk rally," they added. The dollar index stood at 80.056 .DXY, nearly flat on the day and well above a six-week low of 79.757 plumbed a week ago, which remains a support level. Many market players expect the Fed will trim its monthly $85 billion bond-buying program by $10-15 billion at most when it eventually chooses to do so. Still, a no-taper decision on Wednesday could dent the dollar, although it may hold its own against the yen, which tends to get hit when risk appetite rises. "Considering that share market fell after the end of QE1 and QE2, there's a chance we could see similar negative impact," said Shin Kadota, chief FX strategist at Barclays, referring to the Fed's previous episodes of transitioning from one asset-purchase phase to the next. The dollar added 0.3 percent against the yen to 102.93 yen after rising as high as 103.04 yen, though still below a five-year high of 103.925 yen reached on Friday. The euro added 0.4 percent to 141.81 yen, though remained below its own a five-year high of 142.82 yen also touched on Friday. Data released on Wednesday showed Japan posted a November trade deficit of 1.29 trillion yen ($12.56 billion), marking a record 17 straight months of deficits as a weak yen inflated the cost of imported fuels. The euro was also nearly flat at $1.3772, below a two-year high of $1.3833 hit in October. The euro has been helped by European banks' repatriation of funds to shore up their capital bases before the European Central Bank's asset review as well as rise in euro zone interest rates in the past few weeks. Euro zone finance ministers made progress on Wednesday on some details of a plan to close banks, paving the way for completion of a euro zone 'banking union' that is to restore confidence in the financial sector and boost growth. The rise in euro zone rates reflects both seasonal tightening in money markets ahead of the year-end as well as diminishing expectations that the ECB will adopt negative interest rates. Sterling rose slightly but stayed close to three-week lows against the dollar and a six-week low versus the euro, after benign UK inflation data dampened speculation about early rate hikes. The pound traded at $1.6280, up about 0.1 percent. The Australian dollar rose about 0.1 percent to $0.8902 after it slumped to a fresh four-month low of $0.8879 overnight as the Australian central bank repeated its recent message that the currency was uncomfortably high. Reserve Bank of Australia Governor Glenn Stevens said earlier on Wednesday that an Aussie above $0.90 is not suitable for the economy, keeping pressure on the currency. In a rare media interview on Friday, Stevens said he thought $0.85 was a more reasonable level than $0.95. Source : Reuters
