FX round-up: Yen zooms higher on sterling, dollar ahead of Fed, BoJ

Sterling and the dollar dived to two-week lows against Japan's yen as traders expect fireworks from that country's central bank Friday, and see the US Federal Reserve standing pat on rates Wednesday.

At 17:35 BST, sterling was down 0.95% at 137.718 yen, while the dollar shed 0.95% to 104.8 yen, both at levels seen 12-15 days ago.

Sterling was down 0.01% to $1.3139, as the dollar spot index eased 0.09% to $97.201. Gold -- locked in a fierce tug-of-war with US rate-hike expectations -- fell 0.05% to $1318.9 an ounce.

"The Japanese yen rallied on reports (Bank of) Japan will double its fiscal stimulus programme by 6 trillion yen (on 29 July), double the current programme but well beneath previous talk of 20 trillion," said market analyst Jasper Lawler of CMC Markets.

"The unimpressive fiscal stimulus expansion could be opening the door for helicopter money, but more likely means Japan still doesn’t have the political will for more Abenomics," said Lawler, referring to Japan's prime minister, Shinzo Abe.

Bank of America-Merrill Lynch added that financial markets will be waiting for "major fireworks from the BoJ, which may or may not materialise."

The kiwi and aussie also rallied against the cable's constituents, the central banks of both those South Pacific countries being expected to cut their benchmark rates in August.

Sterling fell 0.64% to NZ$1.8662 and down 0.6% to AU$1.7485. The greenback eased 0.62% to NZ$1.4205 and lost 0.61% to AU$1.3306.

Returning to the interest-rate theme, Lawler observed that sterling rebounded off lows after Bank of England policymaker Martin Weale spoke earlier today.

Weale said "immediate measures may be needed" to combat a slowdown in the UK economy following a drop in business sentiment data.

"Weale's comments were a surprise coming off his suggestion a week ago that there was 'no need for rate cut'," said Lawler.

Sterling has been firmly under the cosh since a thin majority voted for the UK to quit the European Union in a non-binding referendeum last month.

Meantime, the dollar was overall lower against commodity units, but managed limp gains on the loonie and euro ahead of the Fed's interest-rate announcement on Wednesday.

FXTM Research analyst Lukman Otunuga argued that the rising optimism over the Fed potentially raising US rates in 2016 has installed the dollar bulls with enough inspiration to rattle the global currency markets.

"For an extended period, hopes over the Fed taking action have bolstered the value of the dollar and the renewed optimism could cause Dollar strength to be a dominant theme in the markets," he contended.

"If the Brexit anxieties ease with the flow of time, then the Fed could be provided a compelling reason to break the tradition of central bank caution by raising US interest rates."