By Gregor Stuart Hunter
SINGAPORE, March 19 (Reuters) - The yen teetered on the cusp of a two-year low at the start of trading in Asia on Thursday, pressured by a firmer dollar as markets watched for how the Bank of Japan will balance inflation risks against slowing growth in the shadow of the Iran conflict.
The yen was up 0.1% at 159.78, edging back from its weakest levels in two years as Japanese Finance Minister Satsuki Katayama said that authorities are on heightened alert for currency market volatility
and that recent movements have been driven partly by speculators.
The Bank of Japan's decision set for later in the day comes midway through a pivotal week of major central bank meetings, as traders hunt for clues on how policymakers will respond to the energy price shock.
The Federal Open Market Committee held interest rates on Wednesday and projected higher inflation, steady unemployment and a single reduction in borrowing costs this year, a path that Fed Chair Jerome Powell said was subject to unusually high uncertainty as policymakers take stock of the impact of the U.S.-Israeli strikes on Iran.
"Chair Powell was extremely vague on how the FOMC would respond to the war, repeatedly refusing to make conjectures on whether inflation or employment effects would dominate," said Steve Englander, global head of G10 FX research at Standard Chartered in New York.
"The hawkish part was the frustration Powell expressed at the slow pace of disinflation, very explicitly conditioning further policy rate cuts on inflation moving closer to target."
The dollar clung to gains on Thursday as traders assessed the Federal Reserve decision to hold rates against the backdrop of accelerating U.S. inflation amid a raging Middle East conflict and surging oil prices.
The U.S. dollar index, which measures the greenback's strength against a basket of six currencies, edged down 0.1% to 100.11, holding near its highest levels of the last four months, as traders reined in bets that the Fed would cut interest rates later this year.
The Fed's decision came after data released on Wednesday showed the biggest increase in producer prices for seven months during February, driven by higher costs for services and a range of goods prior to the start of the war in the Middle East.
Financial markets are fully pricing in a hold at the U.S. central bank's April 29 meeting, with expectations of further easing pushed out to 2027. Fed funds futures imply that the odds of a rate cut in December are little better than a coin toss, according to the CME Group's FedWatch tool.
In Asia, market attention moves to the Bank of Japan, which is expected to keep interest rates steady when it meets later on Thursday, awaiting more clarity on how the Middle East conflict could affect growth and inflation trends in the import-reliant economy.
BOJ Governor Kazuo Ueda is likely to maintain the BOJ's pledge to keep raising still-low borrowing costs but offer few clues on the next rate-hike timing, which would depend much on how long the war could last, analysts said.
Oil prices climbed further, with Brent crude futures rising 4.2% to $111.87 a barrel after Iran attacked several energy facilities across the Middle East following a strike on its South Pars gas field.
The euro climbed 0.1% to $1.1469, while the British pound nudged up 0.1% to $1.3273. Both the European Central Bank and the Bank of England are expected to keep rates on hold when they meet to announce policy decisions later on Thursday.
The Australian dollar edged up 0.2% to $0.7040, after data for February showed unemployment ticked up to 4.3%, slightly above market estimates, and the Reserve Bank of Australia on Thursday warned the conflict in the Middle East was a material risk to the domestic economy.
The New Zealand dollar was up 0.3% at $0.5816 after official data released earlier showed gross domestic product rose 0.2% in the fourth quarter on the prior quarter, but was weaker than analysts' expectations and the central bank's forecast. The Reserve Bank of New Zealand also said it intended to make changes to its approach to Open Market Operations.
Against the Chinese yuan, the U.S. dollar was down 0.1% at 6.8965 yuan in offshore trade.
Bitcoin was flat at $71,242.37, while ether was up 0.6% at $2,200.44.
(Reporting by Gregor Stuart HunterEditing by Shri Navaratnam)
