LONDON: The yen recovered from a 2-1/2 year low against the dollar on Monday with traders trimming large bets against the currency in case easing measures expected from a Bank of Japan meeting fall short of expectations.
The yen is likely to stay firm until the BOJ's policy decision is known after the two-day meeting ends on Tuesday. The central bank, which is expected to double its inflation target and increase its asset purchase programme, said it would begin its meeting on Tuesday earlier than usual.
Traders and analysts said if the BOJ met expectations then the dollar would lose a bit more ground, given its has made huge gains since October and investors like hedge funds would be keen to book profits.
Short yen and long dollar positions were significantly large before the BOJ meeting. Financial markets are expecting a joint statement from the bank and the government to announce a 2 percent inflation, an increase in asset purchases with an open-ended commitment, and possibly other measures, traders said.
The dollar rose to as high as 90.25 yen earlier on Monday, its highest since June 2010. It later slipped 0.7 percent on the day to 89.39 yen, as traders cut short positions given the BOJ has often fallen short of market expectations.
"We see a bit of short covering going into the BOJ meeting with people being a little mindful that there could be some disappointment," Jeremy Stretch head of currency strategy at CIBC World Markets.
"Investors are being mindful that the moves we have seen over the course of the last month or two are just worth locking in at least until we understand how the BOJ are really going to play in the future."
Chartists cited support for the dollar near 89.10 yen, the low hit on Jan. 14, and said if it stayed above that investors would still see it as a good opportunity to buy dollars on dips.
Since mid-November, the dollar has risen about 13 percent on the yen while the euro has risen about 20 percent against the Japanese currency.
"From here we will probably see rallies sold into ... as the street reduces short yen positions into the BOJ meeting tomorrow," said Jeffrey Halley, FX trader at Saxo Capital Markets in Singapore.
Against the yen, the euro fell 0.8 percent to 118.95 yen , off a 20-month peak of 120.73 hit last week, while the Australian dollar shed 0.5 percent to 94.19 yen, slipping from a four-year high of 95.02 set Friday.