The yen and euro traded in narrow ranges on Wednesday, with investors reluctant to second-guess central bankers in the run-up to tricky monetary policy decisions in Tokyo and Frankfurt.
The yen held close to a one-month high against the dollar as markets took the view that the Bank of Japan might fall short of expectations for aggressive easing on Thursday.
The euro looked vulnerable given a recent run of weak Euro zone data that, when added to political turmoil in Italy and concerns over Cyprus, could lead European Central Bank President Mario Draghi to strike a dovish tone hours after that in his post-meeting comments.
Analysts said choppy moves in currencies were unlikely before the end of the Bank of Japan's April 3-4 policy meeting, in which it is widely expected to ramp up its bond buying and extend the maturities of the bonds it purchases.
But some who have sold the yen in anticipation of bold stimulus measures to beat deflation in Japan are worried the BoJ, in its first policy review under new governor Haruhiko Kuroda, might not live up to expectations.
"The question most investors face is, given that we have seen such a sharp move higher in dollar/yen since mid-November last year, very little was on actual policy moves, it was mainly based on expectations and the time has come to deliver," said Raghav Subbarao, FX strategist at Barclays Capital.
"While I do think there is some potential for disappointment I think the downside is limited as the focus will shift to the end of the month, when the BOJ meets again, and they could be more aggressive then," he said.
He added that the dollar could cross 100 yen in the next six months.
The dollar was up 0.1 per cent at 93.46 yen, holding above a one-month low of 92.57 yen set on Tuesday. The US currency was still some way off a 3-1/2 year high of 96.71 yen set last month.
The dollar has climbed around 20 per cent against the yen since November, when markets first started pricing in more aggressive monetary easing from the BoJ.
As a result of wariness ahead of the meeting long positions in the dollar versus the yen have likely been pared back over the past few weeks, traders said. That lighter positioning may limit the scope of any drop in the dollar after the BoJ's decision on Thursday.
Euro weakness
The euro held steady against the dollar at $1.2820, not too far from a four-month low of $1.2750 set last week. A reported large option expiry at $1.2800 is likely to keep the common currency pinned near these levels and traders cited model funds as the main buyers of the euro.
The euro has been on the back foot since a business survey showed on Tuesday that manufacturing across the Euro zone fell deeper into decline in March.
Political deadlock in Italy, where attempts to form a government have so far failed, and concerns about the implications of Cyprus's bailout for other indebted euro zone countries also curbed demand.
Although the ECB is expected to keep interest rates unchanged at Thursday's meeting, analysts said the overall trend was for a drift lower in the euro.
"There does seem to be a bias towards looking for a slightly weaker euro ahead of Draghi because of soft numbers yesterday, and we still have the Italian carry-on and Cyprus," said Daragh Maher, FX strategist at HSBC.
The euro found brief support on news that the International Monetary Fund will contribute 1 billion euros over three years to the 10 billion euro bailout for Cyprus.
In the near term, last week's low of $1.2750 is likely to provide support for the euro, while any gains could be capped by the 200-day moving average at $1.2889.
The euro was up 0.1 percent at 119.87 yen, but still near Tuesday's five-week low of 119.15 yen.
