LONDON: Currency markets were off to a relatively quiet start on Monday, stabilising after last week's wild swings, as investors geared up for Japanese and U.S. central bank policy meetings that could offer them fresh direction.
There are also interest rate decisions from the Swiss, Australian and Norwegian central banks this week along with the Bank of England. All these meetings are likely to provide a test of central banks' ability to successfully manage market expectations, analysts said.
Traders said the euro was little moved by German election results over the weekend, where Chancellor Angela Merkel and her conservative CDU party received a drubbing.
Nevertheless, the low-yielding euro shed 0.3 percent to trade at $1.1110, hurt in part by rising stock markets, but not far from a one-month high of $1.1218 set last Thursday when it soared after the European Central Bank eased extensively while also signalling that it may limit future interest rate cuts.
The dollar eased against the yen to 113.70 yen having gained 0.6 percent on Friday. Improved risk appetite had lifted the greenback from a low of 112.225 to as high as 114.45 versus the safe-haven yen last week.
For dollar bulls, the focus was on the Federal Open Market Committee meeting. While signs U.S. inflation is picking up will be seen as a positive, the Fed will be wary of sounding too hawkish, with Chair Janet Yellen likely to convey a fairly neutral tone.
"The meeting could see an acknowledgement of slightly improved conditions ... the Fed wants to make sure these developments have taken hold before acting. Such a dovish message could see downward pressure on the dollar," said Josh O'Byrne, currency strategist at Citi.
The Bank of Japan, fresh from adopting negative interest rates in January, is expected to stand pat when its two-day meeting ends on Tuesday.
The market will sift through the BOJ's policy statements for any hints that it may be losing confidence in negative rates after the ECB suggested it will have to be cautious on cutting ever deeper.
"Despite the large scale ECB easing last week, our economists are not looking for the BOJ to follow suit, certainly not in terms of a lower negative rate," said Viraj Patel, currency strategist at ING.
"If anything, the BOJ may look to ease some of the burden on the financial sector and this may come in the form of a small expansion of corporate bond/ETF purchases or increased exemptions of funds subject to the new negative rate policy."
The BOJ's surprise decision to take rates below zero on Jan. 29 did little to weaken the yen, which eventually soared to a 16-month high against the dollar last month.
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