By Ian Chua
SYDNEY (Reuters) - The yen stayed on the defensive early on Friday as the market waited to see if the Bank of Japan would ease policy, while the dollar languished at two-week lows in the face of disappointing U.S. economic data.
New orders for long-lasting U.S. manufactured goods in December recorded their biggest drop in 16 months as lower oil prices and a strong dollar pressured factories.
The report was the latest indication that economic growth braked sharply at the end of 2015, a trend that could put the Federal Reserve's tightening cycle on ice.
The dollar index last stood at 98.587 <.DXY>, having slid as far as 98.425 - a low not seen since Jan. 15. The euro climbed as high as $1.0968 > and was last at $1.0942.
Against the yen, the greenback managed to hold its ground to stay just under 119.00 >. Investors were reluctant to bid up the Japanese currency ahead of the BOJ policy review.
While no policy action is likely on Friday, the BOJ is expected to push back the timing for hitting its inflation target. The market is also keen to see if wild swings in global markets and slowing global growth have tilted the risk for further easing.
"If the BOJ does act, our team would expect an expansion of the asset purchase programme and possibly also a cut in the interest rate on excess reserves, perhaps using a tiered framework similar to what the Swiss and Danish central banks have employed," analysts at BNP Paribas wrote in a note to clients.
Weakness in the greenback and a bounce in oil saw commodity currencies perform strongly overnight. The Australian dollar briefly popped back above 71 U.S. cents > for the first time in over three weeks. It last traded at $0.7083.
The Canadian dollar also chalked up solid gains, further aided by the extended rebound in oil prices. Hopes of a deal among oil producers to cut production and help clear a glut have seen prices bounce back.
The loonie stood at C$1.4038 > per USD, having peaked at C$1.3948.
Investors also warmed to sterling after Britain's economy grew in line with expectations in the fourth quarter, countering fears of a worse outcome. The pound climbed to a high of $1.4407, before stepping back to $1.4357 >.
(Editing by Shri Navaratnam)
