Yen stands tall with Fed, China in focus

28/07/2015 07:58 AST

The safe-haven yen held firm in early trade on Tuesday, as investors remained cautious ahead of a two-day U.S. Federal Reserve meeting beginning later this session.

Markets were also skittish in the wake of a plunge in Chinese equity markets in the previous session, which helped the Japanese currency climb to a nearly two-week high.

The dollar was nearly flat on the day at 123.260 yen after falling as low as 123.010 yen in the previous session, while the euro was buying 136.71 yen, after rising as high as 137.10.

Shanghai stocks tumbled 8.5 percent on Monday, their biggest drop in eight years, which helped pull down European and U.S. share markets.

Some investors believe the Fed's rate-setting Open Market Committee could begin hiking rates as early as September, which has underpinned the dollar in recent weeks.

"We think FOMC will surprise on the hawkish side, provided a highly conditional lean to a 2015 lift-off is viewed as hawkish," Steven Englander, global head of G10 FX strategy at CitiFX in New York, wrote in a note to clients.

"Continued Chinese equity market weakness that spills over into U.S. asset markets in a major way would deter them," he said, although he added that current U.S. share levels were not low enough to trouble the U.S. central bank.

"The international dimension for the Fed is whether they think the relevant central banks can deal with the shocks their economies and assets markets are facing. Contagion would have to be much sharper to really register as a proximate risk sufficient to affect U.S. policy," Englander said.

The dollar index, which tracks the U.S. unit against a basket of six major rivals, was steady on the day at 96.552 , after falling as low as 96.288 on Monday, its lowest since July 14.

The euro was steady at $1.10905 after scaling a nearly two-week peak of $1.11295 on Monday as risk-averse investors pared their euro-short positions.

U.S. data on Monday showed non-defense capital goods orders excluding aircraft rose in June, but shipments of core capital goods used to calculate equipment spending in the government's gross domestic product measurement slipped 0.1 percent.

Reuters