Dollar firms with Fed in focus, yen slips back

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By Rae Wee and Alun John

SINGAPORE/LONDON (Reuters) - The dollar held near recent peaks on Thursday, supported by expectations the U.S. Federal Reserve will continue to tighten policy aggressively as it tries to curb inflation, while the yen faltered after jumping sharply the day before.

The dollar was up 0.28% against the yen at 143.58, having fallen 1% on Wednesday on news that the Bank of Japan had checked on exchange rates with banks - a possible preparation for yen buying.

The euro was back below parity against the dollar, down 0.15% at $0.99635, not too far from its 20-year low of $0.9864 hit last week, while sterling likewise was 0.26% softer at $1.15115.

This left the dollar index firm at 109.84, holding onto its 1.5% gain from Tuesday, when U.S. inflation data came in hotter than expected. That caused markets to reposition for a Fed seemingly left with little choice but to go for another large hike at its rate-setting meeting next week.

Fed funds futures are now pricing in around 30% chance that the Fed will hike rates by 100 basis points, and a 70% chance of a 75 basis point increase.

Traders will be watching U.S. retail sales and industrial production data due later in the day, since, as ING analysts note, data is the most likely thing to cause a dovish repricing.

The Fed, in recent months, has been unwilling to push back on hawkish market expectations.

Nonetheless, ING conclude: "We see a good chance that today's data will not trigger any material re-pricing lower in Fed rate expectations, and the hawkish inertia into next week's meeting means that the dollar can stay supported."

The yen was also in focus as investors continued to debate whether or not Japanese authorities really would intervene to support the battered currency, which has fallen nearly 20% this year.

But some market watchers expressed scepticism that there would be a direct intervention, or that it would have much lasting impact. Satsuki Katayama, head of a ruling party panel on financial affairs in Japan, told 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."

In crypto markets, ether did not move significantly after Vitalik Buterin, Ethereum inventor and co-founder, tweeted that a major software upgrade to the Ethereum blockchain aimed at drastically reducing its energy usage has been completed.

The token, which underpins the ethereum network, was down 1.5%. Bitcoin was a touch softer at just under $20,200.