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By Anirban Nag
LONDON (Reuters) - The dollar gained against the yen on Tuesday, helped by U.S. Treasury yields rising on renewed talk that the U.S. Federal Reserve may announce a further reduction of its bond-buying stimulus next week.
The euro fell against the dollar to $1.3535, with focus on German ZEW survey due for release at 1000 GMT, which could give some indication on how sentiment is holding up at the start of the year in the euro zone's largest economy.
A better-than-expected number could nudge the euro higher, but rallies will be sold into given widespread expectations that the European Central Bank will keep policy accommodative and may even cut rates if money market conditions tighten. <MMT/>
While the euro rose against the yen, it was the U.S. dollar's advance that was grabbing attention. The dollar was up 0.5 percent at 104.72 yen, bringing it closer to possible resistance near 104.92 yen, an intraday high hit on January 16.
The dollar/yen pair has a robust correlation with U.S. two-year yields. The rate-sensitive two-year yields rose after the Wall Street Journal said in its online edition that the Fed may announce a further reduction to its monthly bond purchases at the end of its January 28-29 policy meeting, to $65 billion from the current $75 billion.
Such a reduction would be in line with the prevailing market expectations in a recent Reuters survey. <FED/R> Still, traders said the WSJ article was enough to help nudge the dollar higher against the yen.
"We do share the view that monetary policy in the U.S. will be less accommodative and that is helping the dollar against the yen," said Manuel Oliveri, FX strategist at Credit Agricole.
"On the yen side, there is some positioning that the Bank of Japan may sound move dovish at the end of its policy meeting this week. We actually expect them to upgrade growth forecasts and that could actually see some correction in the dollar/yen in the short term. In the medium term we expect the pair to rise."
Key for the yen this week is the outcome of the Bank of Japan policy meeting due on Wednesday. The BOJ is expected to retain a wait-and-see approach, having last year launched a massive stimulus program.
Meanwhile, the New Zealand dollar gave up gains made in the Asian session after inflation data strengthened the case for higher interest rates at home.
"Even if a rate hike is delivered over the months ahead, the Reserve Bank of New Zealand is likely to talk down the markets expectations for further hikes which we view leaves the New Zealand dollar looking vulnerable at current levels," BNP Paribas said in a note.
The New Zealand dollar last changed hands at $0.8306, down 0.15 percent. It had risen to $0.8339 after fourth-quarter consumer price index rose 0.1 percent, beating forecasts for a 0.1 percent fall.
(Additional reporting by Masayuki Kitano in SINGAPORE)