Dollar firm as Fed minutes likely to highlight policy divergence with peers

LONDON: The dollar hit a fresh seven-year high against the yen on Wednesday, and held near a 14-month peak versus sterling, as investors added favourable bets ahead of Federal Reserve minutes that could highlight policy divergence with its peers.

The yen was on the defensive, falling to a six-year trough against the euro, after Japanese Prime Minister Shinzo Abe's decision to postpone a sales tax rise was seen as supportive for stock markets and negative for the yen.

The dollar rose to as high as 117.44 yen, its highest level since October 2007. The dollar last traded at 117.35 yen, up 0.4 percent on the day. The euro was up 0.4 percent at 147.25 yen, its highest since late 2008.

The yen showed limited reaction after the BOJ kept policy unchanged on Wednesday as expected.

Focus now turns to the Federal Reserve which will release minutes of its latest policy review. Traders expect the Fed minutes to sound relatively more hawkish and this could lift the dollar index.

Petr Krpata, currency strategist at ING, said the minutes are likely to reiterate a hawkish tone as reflected in the Fed's statement after its October meeting, which noted that the labour market was improving and inflation was not likely to stay subdued for long.

"Such a message will likely send U.S. rates and the dollar higher and increase expectations for a more material shift in the FOMC bias at the Dec. 19 meeting," Krpata said.

The minutes from the Bank of England's November meeting will also be released at 0930 GMT. They are likely to show that policymakers want to keep interest rates lower for longer.

Sterling was down 0.1 percent at $1.5615, not far from a 14-month low of $1.5593.

"The minutes entail downside risks for sterling," Commerzbank said in a note. "The market will be interested in finding out whether the two dissenters Ian McCafferty and Martin Weale are sticking to their view voiced in early October that the economic environment allows for immediate rate hikes in view of the deteriorating inflation outlook."

The Australian dollar fell 0.6 percent to $0.8663. Much of the Aussie dollar's weakness came after the price of iron ore, Australia's top export earner, slipped to its lowest in five years.