TOKYO (AFX-ASIA) - The dollar was top-heavy in midafternoon trading on investor caution ahead of the U.S. Federal Reserve policy meeting tomorrow, dealers said.
The speculation has surfaced that the U.S. Fed may offer a smaller-than-expected rate cut or maintain the present interest rate unchanged following stronger-than-expected U.S. economic data released Friday, they said.
ABN AMRO foreign exchange manager Toshihiko Masaki said the market has 100 pct discounted the possibility of a 50-basis-point cut, adding, "there will be no surprise."
But BankOne NA foreign exchange vice president Masahiro Ishikawa said he expects a 25-basis-point rate cut at tomorrow's FOMC meeting, adding that "if so, the dollar will sag in line with the expected bearish performance of the U.S. equity and bond markets."
"If a 50-basis-point rate cut is offered, the dollar may maintain its modest bull trend against the yen. But its gains will still be limited to around 123.50 yen."
Ishikawa said the dollar could fall to test the 120 yen level "if there will be no rate cut at the FOMC meeting."
The dollar was firmly bid against the yen due to the decline in the Nikkei 225 index to below the psychologically important 14,000 point level, dealers said.
The euro was pushed off its lows against the dollar thanks to its recovery against the Japanese currency, they said.
BankOne's Ishikawa said while the short-term outlook for the euro remains bearish, its longer-term prospects are not as bad as they seem.
"The market is now re-testing the downside of the euro due to disappointment over monetary policy management (by the European Central Bank)," Ishikawa said.
"But, if the unit is able to stay above the 0.87 usd level until the FOMC meeting, then it will not re-visit this level for the time being."