* Yen up; Japan minister warns more steps could be taken
* Caution sparks hedging ahead of Fed meeting
* Sterling rises on stronger-than-expected growth data
(Recasts, updates prices, adds detail, comment, byline)
By Steven C. Johnson
NEW YORK, Oct 26 (Reuters) - The dollar rose after the euro
again lost momentum near $1.40 on Tuesday, while the yen fell
from a 15-year peak after a Japanese minister called gains
one-sided and warned authorities could act to stem further yen
strength.
The euro and yen each shed 1 percent against the dollar,
which rose to 81.65 yen, slightly more than a yen above a
15-year low hit on Monday <JPY=>.
Although both the euro and yen were within recent well-worn
ranges, some traders said the U.S. currency was benefiting from
a creeping sense that the Federal Reserve may proceed more
cautiously than previously thought if it launches a new round
of monetary easing when it meets next week as expected.
Few doubt the Fed's intention to announce plans to buy more
U.S. government bonds, a process that would push down U.S.
interest rates and undermine the dollar's appeal to investors.
But some said traders were getting cautious as the Nov. 2-3
policy meeting draws closer and after the 10-year Treasury
yield snapped out of a downtrend and rose above 2.60 percent.
"The big question is what happens once we get past the Fed
event," said BNP Paribas strategist Sebastien Galy. "If you're
highly levered in a single position, you look for ways to hedge
exposure to disappointment, because it gets dangerous when
everyone has the same position."
Markets have priced in about $500 billion of Fed bond
purchases over six months, and a more modest approach could
spark a further correction.
CAUTION WEAKENS EURO
Traders said that outlook explains the profit-taking on
long euro positions and the dollar's sharp rebound against
high-yielders such as the Australian dollar <AUD=D4>, down 0.9
percent.
The euro fell 0.8 percent to $1.3843 <EUR=>, breaking
through support clustered $1.3866, around its 21-day simple
moving average. It failed to close above $1.40 on Monday.
Demand for "out-of-the-money" puts on the S&P 500 index and
dollar calls against the euro have risen, traders said.
With U.S. interest rates already near zero, another round
of asset purchases would be "one of the last bullets the Fed
has in its gun, and it's gong to be very reluctant to fire it
unless circumstances are really dire," said Brian Dolan, chief
currency strategist at Forex.com.
The Fed bought $1.7 trillion in mortgage-backed and
government bonds during a first round of quantitative easing.
Galy said the trend may continue beyond the Fed meeting as
well, as investors look to lock in profits ahead of year end.
On the euro, CitiFX strategists said they had closed long
euro bets against the dollar, sterling and Swiss franc.
Omer Esiner, chief market analyst at Commonwealth Foreign
Exchange, said the euro could fall as low as $1.3750 in the
short term and said it would probably struggle to rise back
above $1.40 for fundamental as well as technical reasons.
"Even after the Fed meeting, we think the euro's hit a top
against the dollar, and protests in France are reminding people
of the problems European governments there are going to have as
they implement austerity packages," he said.
STERLING UP, YEN INTERVENTION IN FOCUS
A report showing U.S. consumer confidence rose slightly in
October helped the dollar on the margins, but it was sterling
that got the biggest boost from economic data, rising 0.6
percent to $1.5825 <GBP=D4> after a report showed the UK
economy grew more rapidly than thought in the second quarter.
The dollar was up 0.9 percent at 81.58 yen <JPY=> after
Japan's finance minister, Yoshihiko Noda, warned the government
would "act decisively" in markets if needed. []
Japan intervened to sell the yen in September for the first
time since 2004, and markets fear a second round of yen selling
if the currency nears 80 per dollar. Traders said Japanese life
insurers and banks were among the yen sellers on Tuesday.
(Additional reporting by Nick Olivari; Editing by Leslie
Adler)
