WORLD FOREX: Yen Gains Vs Dollar

By Robert Flint and Rob Copeland

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The yen advanced against the dollar and euro Tuesday as investors opted for safety ahead of Wednesday's Federal Reserve policy announcement.

Disappointing Chinese economic data and weak stock prices on China's exchanges soured risk appetite early in the global session. The Japanese currency got a lead on its major rivals that it never yielded throughout the session, while the euro and dollar fought to a standstill.

The greenback continued to rally against its commodity-based counterparts such as the Australian, New Zealand and Canadian dollars, though it gave back an early edge against the euro. Any signal that China's economy may not be doing as well as some hope tends to weigh on growth-sensitive and export-dependent currencies.

Investors are struggling with several currency market themes and appeared unwilling to make bold wagers before hearing what the Federal Open Market Committee has to say about the economy in its statement at the conclusion Wednesday of the Fed's two-day policy meeting.

Markets will look to the FOMC statement for good news about the economy, which could trigger a sell-off in low-risk currencies such as the dollar and yen.

Although the Fed isn't expected to raise rates from the current zero baseline, investors remain wary about what the U.S. central bank will do after the Bank of England's surprise decision to extend its quantitative easing last week.

"If the Fed comes out and says they're seeing weaker-than-expected growth ... look out, that'll be a huge move," said Andrew Busch, chief foreign-exchange strategist for BMO Capital Markets in Chicago.

On the other hand, traders will watch for hints of a possible timetable for the Fed to end its easy-money stance. Any such signals might spook investors who believe the U.S. economy's recovery is still too nascent to withstand a rise in borrowing costs.

With so much uncertainty, the dollar rally that began Friday stalled on Tuesday as many investors remained on the sidelines, resulting in low liquidity and sometimes volatile movements within narrow ranges.

In late afternoon trading, the dollar had fallen to ??95.93 from ??97.11 late Monday, according to EBS. The euro was at $1.4154 from $1.4142 late Monday and was at ??135.74 from ??137.32. The dollar declined to 1.0816 Swiss francs from 1.0853 Swiss francs, while the pound was at $1.6478 from $1.6461.

The Canadian dollar's recent downward correction intensified Tuesday, sending the currency to its lowest levels in nearly three weeks as part of a more general paring back of positions in riskier currencies in favor of the U.S. dollar.

The greenback was trading at C$1.1012 late Tuesday from C$1.0879 late Monday. The Canadian dollar along with other currencies was a victim of an overall intensification of risk aversion, an environment that also saw most global equity markets dive lower and prices for commodities such as oil also backslide.

This tendency has been in effect since Friday, when news of more moderate U.S. job losses in July rekindled optimistic speculation about an accelerating U.S. economic recovery and an earlier move to higher U.S. interest rates.

This new note of uncertainty has led currency players to at least temporarily shy away from typically riskier and less liquid currencies in favor of the more widely traded U.S. dollar and Japanese yen.

"It wasn't Canada in isolation, but in conjunction with other commodity currencies and risk proxies that have been sold off as the market unwinds short positions in the U.S. dollar and Japanese yen," said Jack Spitz, managing director of foreign exchange at National Bank in Toronto. "The U.S. non-farm payrolls number Friday created a number of uncertainties and has been enough of a catalyst to get people shortening up on risk."

(Paul Evans in Toronto contributed to this article.)