Dollar on the front foot as eyes turn to Fed, yen back in reverse

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By Rae Wee

SINGAPORE (Reuters) - The dollar held near recent peaks on Thursday as traders increased bets that the Federal Reserve will become even more aggressive next week in its battle to curb inflation, while the yen faltered after a brief pop in the previous session.

The dollar was up 0.14% against the yen to 143.37 in Asia, after falling 1% in the previous session on news that the Bank of Japan had checked on exchange rates with banks - a possible preparation for yen buying.

But some market watchers expressed scepticism that there would be a direct intervention or that it would have much lasting impact, with Satsuki Katayama, head of a ruling party panel on financial affairs in Japan, telling Reuters that the country lacks effective means to combat the yen's sharp falls.

A record Japanese trade deficit for August has also underscored the bear case for the yen.

"The yen direction of travel continues to be for further weakness ... If they really want to stop the weakness, then a change in BOJ policy is the recipe," said Rodrigo Catril, a currency strategist at National Australia Bank (OTC:NABZY).

"Our sense is that the intervention, sure, it will scare the speculators on the day, but it's unlikely to prove longer lasting."

The Australian and New Zealand dollars gained slightly following domestic data releases, which showed Australian employment bouncing back in August after a surprise dip the month before, and New Zealand's gross domestic product (GDP) rising 1.7% in the June quarter, beating forecasts of a 1.0% gain.

The Aussie was up 0.15% to $0.67575, while the kiwi gained 0.11% to $0.60085.

Sterling fell 0.1% to $1.1530, while the euro slipped 0.07% to $0.9971 - both nursing losses after an inflation surprise sent the greenback surging on Tuesday.

The euro had some help from European Central Bank policymaker Francois Villeroy de Galhau who said on Wednesday that the bank's neutral rate, estimated as below or close to 2% in nominal terms, could be reached by the end of the year.

However, the dollar is in the driving seat ahead of next week's Fed meeting.

Fed funds futures are now pricing in a 37% chance that the Fed will hike rates by 100 basis points.

"The market is kind of in consolidation mode," said NAB's Catril. "Clearly evident in the front end of the U.S. Treasury curve, the market is becoming a bit more emboldened to the reality that the Fed will remain aggressive."

U.S. producer prices fell for a second straight month in August as the cost of gasoline declined further, data showed on Wednesday, though that seemed cold comfort after Tuesday's data already dashed hopes of cooling consumer prices.

The U.S. dollar index, which measures the greenback against a basket of currencies, was up 0.12% to 109.73, not far off its two-decade peak of 110.79.