* Dollar up vs yen after US data, BOJ asset purchase plan
* Yen weakens as risk sentiment improves tentatively
* Improvement in German sentiment index lifts euro
* Investors await end of Fed policy meeting on Wednesday
(Updates prices, adds detail, comment; changes byline)
By Steven C. Johnson
NEW YORK, March 17 (Reuters) - The dollar rose against the
yen on Tuesday as surprisingly strong U.S. housing data whetted
risk appetite and the Bank of Japan plans to buy subordinated
loans raised fears the central bank would flood the market with
yen.
The euro also rose above 128 yen, just shy of its highest
level this year, and gained against the dollar, lifted partly
by data showing stronger-than-expected German investor
sentiment.
"The BOJ move overnight weighed on the yen and we've seen
some relatively robust moves in equities," said Mark Frey, head
of FX trading at Custom House in Victoria, British Columbia.
"But a lot of currency are starting to run out of gas, as
we've seen a moderate rally in risk for six days and now we
need some fresh impetus to drive us from here," he said.
Analysts said that could come at the end of the Federal
Reserve's two-day policy meeting on Wednesday, when Frey said
traders "will want to see how aggressive the Fed will be in
buying paper."
The dollar was last up 0.5 percent at 98.60 yen <JPY=>
while the euro rose 0.7 percent to 128.20 yen <EURJPY=>, near
its 2009 high around 128.74 yen, according to Reuters data.
Yen selling picked up after the Bank of Japan said it would
buy up to 1 trillion yen ($10.2 billion) in subordinated bank
loans to bolster the banks' depleted capital.[]
That sparked fear that the BOJ will flood the market with
yen, putting downward pressure on a currency already struggling
amid worries about the deteriorating Japanese economy.
The euro also rose 0.3 percent to $1.2996 <EUR=> after
briefly pushing above $1.30 for the second straight day. It
could rally further, Frey said, if the Fed on Wednesday unveils
plans to buy long-dated Treasuries. If not, he said risk
aversion will rise and the dollar will likely rally.
The dollar tends to rally when investors grow risk averse
because it's seen as the safest store of value at time when
economies across the globe are contracting. Its role as a main
funding currency outside Europe also enhances its appeal.
Sterling dipped 0.1 percent to $1.4040 <GBP=> while the
dollar was unchanged at 1.1838 Swiss francs <CHF=>.
BOJ RESCUE, AWAITING THE FED
Bank of Japan governor Masaaki Shirakawa said in a press
conference that the loan program was aimed at banks being hurt
by falling stock prices. [].
The Bank of Japan is seen keeping interest rates steady at
0.10 percent on Wednesday but could increase its outright
buying of government bonds.
Overall, though, risk appetite was holding up, thanks
partly to a 22.2 percent surge in U.S. housing starts in
February and a gain in German investor sentiment.
A report showing producer prices actually edged higher in
February, easing some concern about deflation, also lifted
investors spirits. []
Euro gains are likely to be limited, however, ahead of the
Fed policy meeting on Wednesday.
Trading "in euro-dollar looks likely to chop sideways as we
wait for the Federal Reserve (meeting) and in particular any
color on whether they are closer to buying Treasuries," Alan
Ruskin, chief international strategist, at RBS Greenwich
Capital in Greenwich, Connecticut, said in a note.
(Additional reporting by Vivianne Rodrigues)
(Editing by Theodore d'Afflisio)
