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Focus on BOJ; Markets expect policy shift

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Sterling hits five-week high vs dollar

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New York state manufacturing contracts sharply

By Gertrude Chavez-Dreyfuss and Joice Alves

NEW YORK/LONDON, Jan 17 (Reuters) - The dollar fell against most major currencies on Tuesday in choppy trading, weighed down by expectations of a possible policy shift at the Bank of Japan that could end its so-called "yield curve control", which could be a precursor to adopting a tighter monetary policy.

The expectations have pushed the yen higher against the dollar over the last few weeks. Since Jan. 6, the yen has surged nearly 5% against the greenback JPYUSD=R .

Sterling, meanwhile, led gains versus the dollar, hitting a five-week high after data showed the pace of pay growth in Britain, closely watched by the Bank of England as it gauges how much higher to raise interest rates, accelerated again.

But the market's focus remained on the Bank of Japan (BOJ). Speculation is building about a change or end to Japan's yield curve control (YCC) policy, given that investors have pushed 10-year bond yields above a ceiling set by the BOJ of 0.5% and the amount of bond buying to defend it is becoming staggering.

Under the YCC policy, the BOJ targets some short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero, in an effort to sustainably achieve 2% inflation.

The BOJ is expected to make a crucial policy decision on Wednesday after a two-day meeting.

"The BOJ meeting is taking center stage. I think we are going to see a really big move one way or the other and that is helping push the dollar lower across the board," said Joe Perry, senior market analyst at FOREX.com and City Index in New York.

"If the BOJ decides to just tweak their operations, we could see a rebound in dollar/yen to 134.50 or so. But if the BOJ goes full out and discontinues yield curve control, we could see a drop down in 124."

In late morning trading, the dollar was flat to slightly lower against the yen at 128.535 yen JPY=EBS .

Against the Swiss franc, the dollar dropped 0.5% to $0.9218 francs CHF=EBS .

The Australian and New Zealand dollars rose against the greenback, up 0.3% at US$0.6977 AUD=D3 and up 0.6% at US$0.6418 NZD=D3 respectively.

The pound GBP=D3 rose 0.7% against the dollar to $1.2275, after surging to a five-week peak of $1.2299 after data showed UK wages growth picked up more pace in the three months to November, while employment rose by a faster-than-expected 27,000.

EYES ON BOJ

Options trade shows a market braced for sharp moves when the BOJ meeting ends on Wednesday, with overnight implied volatility JPYONO= surging to a six-year high.

"We should not assume that a lifting of yield curve control will be the end of Japan's monetary policy adjustment. The next step will be to start preparing for the end of negative rates ... the BOJ will have to start thinking about QT (quantitative tightening) as well to provide supply to the market," said George Saravelos, FX strategist at Deutsche Bank.

Elsewhere, the U.S. dollar index <=USD was up 0.1% at 102.35. The euro EUR=EBS fell 0.3% to $1.0824.

Since the end of the first trading week of the year, the dollar index has fallen nearly 3%, pressured by U.S. data showing consumer prices were rising at a slower pace. That suggested the Federal Reserve will continue to slow the pace of rate hikes.

Data on Tuesday confirmed the slowdown in inflation. The New York Fed said its barometer on business activity in New York state fell in January to the lowest since mid-2020 as orders plunged and employment growth stalled.

The regional Fed's "Empire State" index on current business conditions plummeted to -32.9 this month from -11.2 in December, Economists polled by Reuters had forecast the index at -9.0.

There was not a great deal of currency market reaction to stronger-than-expected Chinese growth data. The yuan CNY=CFXS last traded 0.6% weaker at 6.7755 per dollar.

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Currency bid prices at 10:54AM (1554 GMT) Description

RIC

Last

U.S. Close Pct Change

YTD Pct

High Bid

Low Bid

Previous

Change

Session

Dollar index

=USD

102.2900

102.2800

+0.03%

-1.160%

+102.5600 +101.9200 Euro/Dollar

EUR=EBS

$1.0804

$1.0824

-0.17%

+0.84%

+$1.0870

+$1.0796 Dollar/Yen

JPY=EBS

128.3750

128.5100

-0.10%

-2.08%

+129.1500 +128.2200 Euro/Yen

EURJPY=

138.71

139.07

-0.26%

-1.13%

+139.6100 +138.6800 Dollar/Swiss

CHF=EBS

0.9215

0.9260

-0.45%

-0.31%

+0.9275

+0.9190 Sterling/Dollar GBP=D3

$1.2276

$1.2196

+0.66%

+1.51%

+$1.2299

+$1.2171 Dollar/Canadian CAD=D3

1.3376

1.3410

-0.25%

-1.28%

+1.3437

+1.3370 Aussie/Dollar

AUD=D3

$0.6982

$0.6956

+0.39%

+2.44%

+$0.6984

+$0.6931 Euro/Swiss

EURCHF=

0.9955

1.0022

-0.67%

+0.61%

+1.0027

+0.9954 Euro/Sterling

EURGBP=

0.8801

0.8872

-0.80%

-0.49%

+0.8888

+0.8799 NZ

NZD=D3

$0.6431

$0.6382

+0.75%

+1.27%

+$0.6436

+$0.6370 Dollar/Dollar

Dollar/Norway

NOK=D3

9.8615

9.9135

-0.56%

+0.44%

+9.9530

+9.8575 Euro/Norway

EURNOK=

10.6581

10.7242

-0.62%

+1.57%

+10.7665

+10.6439 Dollar/Sweden

SEK=

10.3979

10.4040

-0.10%

-0.10%

+10.4551

+10.3704 Euro/Sweden

EURSEK=

11.2362

11.2480

-0.10%

+0.78%

+11.3043

+11.2250

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World FX rates Link

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Reporting by Gertrude Chavez-Dreyfuss in New York and Joice Alves in London; Additional reporting by Tom
Westbrook in Singapore; Editing by Emelia Sithole-Matarise and Mark Potter