By Ankur Banerjee
SINGAPORE, Sept 14 (Reuters) - The dollar firmed on Monday, with the yen's recent rally sputtering near a seven-month high as investors pondered possible rate hikes from the Federal Reserve and Bank of Japan, while a climb in oil prices dampened risk sentiment.
Global policymakers are grappling with erratic pricing pressures as the fighting in the Middle East worsens, pushing oil well above $100 per barrel and upending the path for rates amid bouts of steep selloffs in long-end bonds.
The European Central Bank raised rates last week and warned of further hikes, ahead of a Fed policy decision on Wednesday and a widely expected rate hike from the BOJ on Friday. The Bank of England is expected to stand pat on Thursday, but the voting is likely to be close.
Traders ramped up bets for a Fed rate hike after data on Friday showed U.S. consumer prices accelerated in August; they priced in an 86% chance of an increase this week and another move higher later in the year, the CME FedWatch tool showed.
"Markets are heavily conditioned for a hawkish week, which means the bigger FX surprise risk is probably not who hikes, but who fails to validate current pricing," said Kieran Williams, head of Asia FX at Intouch Capital Markets.
DOLLAR FINDS FOOTING AHEAD OF FED MEETING
The euro was 0.28% softer at $1.1565, while sterling last bought $1.3503. The U.S. dollar index, which measures the greenback against six other currencies, was 0.23% higher at 99.34 after two straight weeks of small declines.
U.S. Treasury yields remained near multi-year highs, with the 2-year yield, which typically moves in step with Fed rate expectations, inching away from a two-year high to 4.61%, after rising 26 basis points last week. [US/]
Rising yields and shifting rate expectations have so far failed to push the dollar significantly higher, as central banks in major economies are also expected to raise rates while worries around Fed policy credibility linger.
Fed Chair Kevin Warsh will need to match his tough rhetoric with policy action or risk further undermining his credibility on controlling inflation, strategists at Commonwealth Bank of Australia said in a note.
"There is a small chance the USD eases if the FOMC hikes but Warsh plays down the risk of follow-up hikes in the press conference," they said.
Meanwhile, Brent crude futures rose 2% to $106.7 per barrel after new Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf compounded supply concerns following the closure of a key Saudi oil pipeline. [O/R]
RISING YEN FACES BOJ RECKONING
The Japanese yen was 0.3% weaker at 154.03 per U.S. dollar, though it remained not far from the seven-month high of 152.89 that it touched last week. Signs are emerging of a shift in market sentiment for the currency, with speculators turning to a net long position on the yen for the first time since February.
"A 25 bps hike is already almost fully priced," analysts at MUFG said, noting that the BOJ will have to signal that they are planning to stick to the faster pace of hikes for the yen to strengthen further.
The yen is up 4% this month on the back of expectations that the BOJ will be faster in delivering rate hikes and signs of potential repatriation of assets by domestic investors.
TD Securities said it expects the BOJ to hike roughly once every quarter, departing from its gradual, semi-annual pace. It said that not putting another hike on the table later this year would risk a knee-jerk dollar/yen rally back to 157 to 160.
Ben Bennett, head of investment strategy for Asia at L&G Asset Management, said central banks across the globe will be keenly watching the Fed’s policy shift.
"If it looks like we're going to get a series of hikes from the Fed, then the BOJ may again be under pressure to follow with a more hawkish message or else we could see renewed yen weakness."
(Reporting by Ankur Banerjee in Singapore; Editing by Thomas Derpinghaus and Edwina Gibbs)
