By Robin Shepherd
The yen rose to two-week highs against the dollar and euro on Tuesday, benefiting from jitters ahead of the Federal Reserve's interest rate decision later in the day and a raft of weak data out of the euro zone.
The euro was all but unchanged against the dollar, but dealers say data marking the worst rise in German unemployment in three years increased the chances of a cut by the European Central Bank which meets on Thursday.
Analysts said the yen seemed the best place to park funds before the Fed decision, due at 1915 GMT, although there was no real fundamental backing for the rise.
"Clearly the dollar is still under pressure because the U.S. economy remains in trouble, as shown in terrible data we had last week from the U.S," said Steven Saywell, currency strategist at Citibank in London.
"The market is not pleased with policy response from the eurozone in both the monetary and fiscal side. So currencies which are most likely to benefit from the weak U.S. dollar would be the yen and sterling," he added.
Analysts predict the Fed will cut its fed funds rate by between 25 and 50 basis points from the current 2.5 percent. The yen rose half a percent against the dollar at one stage to 121.07 and 108.60 to the euro . The euro was unchanged against the dollar at $0.8975 .
Analysts said the yen's rise was not expected to last after poor Japanese household spending data, which registered a real 3.7 percent year-on-year decline in September, reinforced gloom about the state of the economy.
The figures could herald worse than expected fourth quarter gross domestic product numbers and come amid rumours that the Japanese government may revise its growth forecast for the current fiscal year down to minus 0.9 percent from the current forecast for a 1.7 percent expansion.

MARKET WEIGHS FED DECISION
A poll conducted on Friday showed 15 out of 24 U.S. primary bond dealers expected the Fed to trim rates by 50 basis points, with nine seeing a quarter-point cut.
The Fed has already cut interest rates by 400 basis points this year, to buoy the U.S. economy which, in the third quarter, suffered its biggest contraction since 1991. U.S. unemployment in October also reached heights not seen since 1996.
Data released on Monday showed the U.S. National Association of Purchasing Management's reading on the non-manufacturing sector falling to a record low of 40.6, underscoring the weak state of the economy.
"Data from the U.S. has been negative enough to warrant a 50 basis point cut," said Francesca Fornasari, forex economist at Lehman Brothers.
Analysts were focused on how the U.S. equities market would react to a Fed move later in the day. In late morning trade in London, U.S. equities futures suggested a firmer opening on Wall Street.
"I think the real risk will be if they don't do 50. Then the market may be disappointed," said Ken Landon, currency analyst at Deutsche Bank in Tokyo. "The equity market would really be hit hard if they don't cut by 50, and that would be bad for the dollar." EURO ZONE DATA RAISES RATE CUT HOPES Data from Europe brought the European Central Bank's own interest rate meeting on Thursday more sharply into focus. German unemployment, adjusted for factors such as weather and seasonal hiring, rose 27,000 to 3.915 million in October following an increase of 23,000 in September. The figures were seen as providing an additional reason for the ECB to cut rates. The euro zone wide unemployment rate was stable at 8.3 percent in September, while producer prices were up 0.1 percent month on month. The euro zone sentiment indicator hit its lowest level since 1997, falling to 99.1 compared with forecasts for 99.5. There was more bad news on the state of the euro zone economy from the Eurozone Services Business Activity Index. It fell further below the 50 line that divides growth from contraction in October, registering the sharpest drop in its three-year history to 46.7 from 49.0 in September. The survey of 2,000 services companies showed new business fell away in October and, for the first time since the series began in July 1998, the sector cut more jobs than it created. New business fell most sharply in Germany, the region's biggest economy, while overall activity shrank in France and Italy for the first time in the survey's history.