* Euro holds gains after dollar sold on Fed expectations
* Fed seen dampening rate hike prospects, questions over QE
* Yen falls as cross rebound extends
By Charlotte Cooper
TOKYO, June 24 (Reuters) - The dollar sat on steep losses on
Wednesday, after tumbling sharply against the euro and other
majors, as the market got set for the Federal Reserve to dampen
expectations for higher interest rates.
Policy makers at the Fed began their two-day meeting on
Tuesday and many expect they will want to play down expectations
of higher interest rates that have built in the market, for fear
these will choke an economic recovery. []
Currencies such as the Australian dollar, which have been
favoured as recovery plays against the dollar and yen, leapt 1
percent or more on Tuesday as the greenback lost favour.
The euro also jumped 1.5 percent, helped by comments from a
European Central Bank policy maker that he saw no need for more
policy measures at the moment to get the economy back in shape.
[]
"The markets are adjusting themselves ahead of the FOMC,
about their over-expectations for Fed tightening, and are
gradually coming back to reality," said Masafumi Yamamoto, head
of FX strategy Japan at Royal Bank of Scotland.
The euro held firm at $1.4099 <EUR=>, after jumping to
$1.4109 the previous day, its highest since June 12, although it
was still below its 2009 peak of $1.4339.
It gained 0.6 percent to 134.82 yen <EURJPY=R> after rising
nearly 1 percent on Tuesday.
The Australian dollar edged up 0.3 percent to $0.7962
<AUD=D4> and 0.6 percent to 76.18 yen <AUDJPY=R>.
The Aussie has risen 26 percent against the dollar since its
rally started in the first quarter and 37 percent against the yen,
although it has backed off its rally highs as investor confidence
has faltered on nervousness that gains have got ahead of an
actual economic recovery.
"The market is likely to go back to a 'recovery trade' after
some adjustments. Still, I expect the corrective phase to last a
while," said Tohru Sasaki, chief FX strategist at JPMorgan Chase
Bank in Tokyo.
NO COLD TURKEY
The Fed, which makes its announcement at 1815 GMT, will also
be under scrutiny for what it says about its asset buying
programme aimed at keeping longer-term interest rates down.
Investors want to know if it will keep and extend the
programme, which includes buying U.S. Treasuries, or whether it
will even want to start winding the measures down.
"The statement is expected by the market to reaffirm a
commitment to low rates, signal emergency lending is already
tapering off but also signal that the Fed is unlikely to stop its
asset purchases cold turkey," UBS analysts said in a client note.
The dollar gained on the yen, climbing 0.4 percent to 95.62
yen <JPY=> after shedding 0.7 percent on Tuesday, although it
remains well within a 94-100 yen range of the past two months.
Dealers said the market had covered short dollar positions
ahead of the Tokyo fixing earlier due to talk about several big
investment trusts expected to be launched on Wednesday which were
likely to attract plenty of funds for investment abroad.
However one trader at a Japanese trust bank said flows
related to the investment trusts, or "toshin", were likely to
come in London trade rather than Tokyo hours.
A newspaper report that Japanese Finance Minister Kaoru
Yosano's political support group accepted illegal donations from
a dummy organisation had little impact in the currency market,
dealers said. []
Yosano was quoted by Kyodo news agency as saying he did not
believe there had been wrong-doing. Polls show the ruling Liberal
Democratic Party (LDP) risks losing to the opposition Democratic
Party in elections which must be held by October.
"Ultimately, the report is unlikely to have any impact in the
currency market as the financial policy of the LDP and the
Democrats isn't all that different, even if the Democrats were to
end up winning the election," said Hideki Amikura, a deputy
general manager of forex trading at Nomura Trust and Banking.
(Additional reporting by Aiko Hayashi and Satomi Noguchi;
Editing by Joseph Radford)
