NEW YORK: The dollar firmed against the euro and the yen on Wednesday ahead of a US Federal Reserve meeting and first-ever individual interest rate projections from policymakers, while Japan's first trade deficit since 1980 fueled yen weakness.
The Fed looks set to keep monetary policy on hold, even as it releases individual forecasts expected to show interest rates will be near zero for at least two more years.
A statement outlining the Fed's views on the economy and monetary policy is slated for release at about 12:30 p.m. (1730 GMT). The rate projections, along with regular quarterly economic forecasts, will be issued at 2 p.m. (1900 GMT).
Fed Chairman Ben Bernanke is due to hold a press conference at 2.15 p.m. (1915 GMT).
With no interest rate changes expected, "I think for the dollar the outcome of the Fed meeting should be more a function of what it does to risk," said Robert Lynch, head of currency strategy for the Americas at HSBC in New York. "We need to see the nuances of their statement."
Speculation on what policymakers could say was rife, and some investors and traders could be hesitant to take up positions ahead of the meeting's results, said Andrew Cox, G10 strategist at CitiFX in New York.
"I think much of this is largely a distraction and does not really change too much for the USD," he added.
Investors are looking for a potential nod to recent strengthening in US economic data, said Blake Jespersen, managing director of foreign exchange sales at BMO Capital Markets.
"It would be nice to see the Fed upgrade some of their forecasts for growth. Markets want them to acknowledge that the economy is improving," Jespersen said.
The yen extended losses from the previous session as Japan's first annual trade deficit in more than 30 years called into question how much longer the country can rely on exports to help finance a huge public debt without having to turn to fickle foreign investors.
The dollar reached as high as 78.28 yen, according to Reuters data, its highest since early November. The greenback was last trading at 78.21 yen.
"We'd like to see it hold above that level" of 78 yen, Jespersen said. "We've seen a lot of accounts putting on short yen trades."
Chartists highlighted resistance posed by the 200-day moving average at 78.33 yen and the 61.8 percent retracement of the October-January fall at 78.31 yen.
GREECE JITTERS WEIGH
The broad weakness in the yen lifted the euro to a four-week peak of 101.86 yen. It was last at 101.45 yen, 0.25 percent higher on the day in choppy trading but well above an 11-year low struck on Jan. 16.
The euro gave up gains against the dollar from a boost on rising German business sentiment, as growing worries that the European Central Bank would have to write down its holdings of Greek debt, crimping its ability to purchase other euro zone periphery debt, drove Italian yields higher.
"Investors are waiting for more definitive progress in talks for private sector bondholders to take voluntary losses on Greek government debt, while reports that the ECB remain opposed to restricting its Greek debt holding is weighing on sentiment," noted Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
The common currency has been supported against the dollar in recent sessions by a squeeze in extreme short positions. A decline in funding costs for Spain and Italy and recent data showing surprising strength in manufacturing and services this month have also lent support.
"Risk appetite generally is consolidating, easing a bit following what had been a material rally in risk assets in recent weeks," HSBC's Lynch said.
The euro was last trading down 0.38 percent for the day at $1.2972, off a session high of $1.3051. It struck a three-week peak of $1.3062 on Tuesday, with resistance in the $1.3075-1.3080 area - highs struck this month and in late December.
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