LONDON (MarketWatch) -- The Japanese yen and the U.S. dollar were mixed Wednesday, consolidating ahead of the U.S. Federal Reserve's decision on interest rates.
"We suspect the market will likely lay low for now, with most looking ahead to the Fed announcement this afternoon," analysts at Action Economics said in a note.
The Fed's rate-setting Federal Open Market Committee is widely expected to slash its key lending rate by half a percentage point to 1%. See full story.
Meanwhile, the yen and the dollar retreated Wednesday on ideas the Bank of Japan could move to trim its already-low lending rate in an effort to dampen the Japanese currency's strong rise.
"As expected, fears that the BOJ may intervene to stem the Japanese yen appreciation offered some relief" to dollar-yen and euro-yen currency pairs, wrote strategists at UniCredit MIB in Milan, who cautioned against going long either pair "at this stage."
Expectations for a Japanese rate cut weighed on the yen and sparked a sharp rally on Wall Street late Tuesday.
Recent behavior patterns in the foreign-exchange markets held up, with the euro rising on rising risk appetite and reacting negatively to recession fears, said strategists at Commerzbank.
"With the explosive jump in equity markets, [the euro] managed to rise strongly (versus the dollar) in late American trading, peaking at $1.2845," they wrote. "Against the yen, though, the greenback can post considerable gains, since the yen suffers even stronger from the decline in risk aversion."
The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, traded at 85.120, down from 86.347 in North American trade late Tuesday.
The U.S. currency received little support from better-than-expected data on orders for durable goods in September. See full story.
The dollar traded at 97.14 yen, down from 97.61. The euro bought 125.74 yen, up from 123.99 yen late Tuesday and well above Tuesday's low of 114.68.
The yen hit a 13-year high against the dollar Friday and gained Monday despite a weekend warning from Group of Seven finance ministers and central bankers against "excessive" yen volatility. See full story.
The yen has rallied sharply in recent months, boosted by unwinding of once-popular carry trades and causing pain for Japanese exporters. The yen retreated Tuesday, however, after a news report said the BOJ is leaning toward cutting its benchmark interest rate. See full story.
The euro rose to $1.2898 against the dollar, up from $1.2707.
The British pound changed hands at $1.6189, up from $1.5921 late Tuesday.
Strategists said a half-point cut by the Fed has largely been factored into the market and is unlikely to have a particularly adverse impact on the dollar.
"Another 50 basis-point rate cut by the FOMC tonight is so widely expected that we doubt that the U.S. dollar may react negatively," the UniCredit strategists wrote, adding that they continue to suggest short positions "for now" in euro/dollar and sterling/dollar currency pairs.
Meanwhile, analysts at BNP Paribas said U.S. equity gains could feed a "false sense" that risk appetite is on the rebound, which could support a sharp rally in traditionally high-yielding currencies.
Anecdotal evidence "suggests that the rebound in U.S. equity markets yesterday was in some part related to the forced rebalancing of portfolios by pension fund managers," they wrote.
Mounting risk aversion over the past month had seen pension funds hold a higher proportion of cash and fixed-income securities to equities, they said. As the end of the month approaches, pension funds have to rebalance their ratios for window-dressing purposes, requiring them to buy equities.
