* China stocks fall, prompting investors to cut yen shorts
* Focus on what Fed will say about Treasuries buying scheme
* Talk of dlr/yen selling related to Treasury coupon payments
By Satomi Noguchi
TOKYO, Aug 12 (Reuters) - The yen rose against the dollar on
Wednesday as Chinese shares tumbled and prompted investors to
further liquidate yen short positions ahead of a policy statement
from the U.S. Federal Reserve later in the day.
The Shanghai Composite Index <> fell 3 percent on the
day due partly to waning investor confidence in the market after
a heated rally of more than 90 percent since the start of the
year peaked at a 14-month high last week.
Falling Chinese stocks dented demand for riskier currencies
and prompted investors to cut long positions in higher-yielding
currencies such as the Australian dollar.
Uncertainty about the overall market reaction to the Fed's
policy decision later on Wednesday also made investors cautious
about keeping big positions, traders said.
"The currency reaction after the Fed is hard to predict. But
one thing that is certain is that long positions that had been
stretched are now looking vulnerable to liquidation," said
Shuichi Kanehira, head of FX spot trading at Mizuho Corporate
Bank.
The dollar fell 0.5 percent to 95.55 yen <JPY=> compared with
late U.S. trading on Tuesday.
There was some talk of dollar-selling by Japanese investors
repatriating funds related to $27 billion in coupon payments on
U.S. Treasuries due on Aug. 15. In addition, $61 billion in
coupon securities will mature on the same day.
Traders also said the dollar's jump to an eight-week high
near 98 yen late last week following better-than-expected U.S.
employment data was overdone, and investors were now cutting
dollar long positions versus the yen.
"The recovery story has been pushed hard, very hard, and it
makes sense to see this momentum unwind a little," said Adam
Carr, senior economist at ICAP, Sydney.
"Particularly when there are plenty of equity analysts
running around arguing strong moves to date don't reflect
fundamentals."
The euro fell 0.5 percent to 135.19 yen <EURJPY=R> and the
Australian dollar dropped about 1 percent to 78.74 yen
<AUDJPY=R>.
The Australian dollar fell 0.7 percent to $0.8245 <AUD=D4>,
while the euro was steady at $1.4151 <EUR=>.
FED AWAITED
The Fed will conclude its two-day policy meeting and release
a statement around 1815 GMT, with investors looking to its
assessment of the economy and whether it unwinds some of the
unconventional easing measures currently in place.
There is mounting speculation it might grow more optimistic
about a recovery after the better-than-expected jobs report for
July. There is talk it may start putting in place strategies to
withdraw some of its extraordinary stimulus with investors
looking for the first interest rate hike in March.
Any downside surprise, like from the Bank of England last
week, could negatively affect the greenback.
But if the Fed states clearly that it will not expand or
extend its $300 billion Treasury buying programme, due to expire
in September, the dollar seems likely to rise against the euro
and sterling, said Yuichi Hojo, director of FX distribution at
UBS AG's Tokyo branch.
"If the supply of ample money is tightened, that would lead
to a higher currency. It could lead to an outlook for interest
rates to be raised," Hojo said.
"Since there has been quite a build up in dollar-selling and
euro-buying, sterling-buying positions, there could be some
correction of that," he said.
A trader for a European bank, however, said he was sceptical
the Fed would state that it will end its buying of Treasuries,
adding that he thought the Fed would continue such buying in some
form.
"That would put a strong focus on the exit strategy," the
trader said, adding that such a decision could send market
interest rates soaring and be negative for equities.
(Additional reporting by Masayuki Kitano in TOKYO and Anirban
Nag in SYDNEY; Editing by Chris Gallagher)
