By Amanda Cooper
LONDON (Reuters) - The euro rose on Tuesday following a report that indicated the European Central Bank may soon start discussing how to drain some of the excess liquidity in the banking system, while the yen wallowed near 10-month lows against the dollar.
A Reuters report on Monday citing six sources said the debate over the multi-trillion-euro pool of excess liquidity sloshing around banks was likely to start next month.
The excess cash dulls the impact of the ECB's rate hikes by reducing competition for deposits and results in hefty interest payments - and ensuing losses - by some central banks.
The euro rose by as much as 0.4% at one point on Monday to nudge at $1.07 and, by Tuesday, had retained those gains, trading up 0.1% on the day at $1.07.
However, this might not be enough to give the euro a more sustained boost, according to Lee Hardman, a strategist at MUFG.
"While the ECB’s reported plans to tighten excess liquidity in the euro area have helped to support the euro, they are unlikely to be sufficient on their own to turn the current weakening trend," he said.
The euro has been gradually losing steam over the last two months, since hitting a 15-month high, as the ECB has neared the end of its current cycle of rate rises. According to the most recent weekly data from the U.S. regulator, speculators have cut their bullish position in the euro to the smallest in 10 months.
This week brings a raft of central bank meetings, including those of the Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank, among others, which kept currency volatility on the subdued side.
The yen is drawing a lot of focus at the moment, as the BOJ prepares to meet to discuss monetary policy on Friday.
It hit a 10-month low of 147.95 per dollar last week and by Tuesday, was not far off that mark, flat on the day at 147.65. The last time the yen was this weak was last autumn, when Japanese authorities intervened to prop it up.
Expectations are for the BOJ to maintain its policy of ultra-low interest rates and reassure markets that monetary stimulus will stay in place, at least for now, even as Governor Kazuo Ueda stoked speculation of an imminent move away from the central bank's current policy stance.
"Our sense is that the BOJ needs ammunition in order to back itself in terms of any shift or even any guidance for (a) potential shift in policy over the coming six months to the next year," said Rodrigo Catril, senior FX strategist at National Australia Bank (NAB).
"And we think that needs to happen with a set of new forecasts, and that's why we don't think that we will get many surprises on Friday."
The U.S. dollar index eased modestly, down 0.1% at 104.96, near last week's six-month peak.
Money markets expect the Fed to keep rates on hold at its upcoming meeting, according to the CME FedWatch tool, though focus will be on the central bank's forward guidance.
"The market is fully pricing in a hold and this meeting was always likely to be a pass since the Fed skipped June, effectively moving to an every-other-meeting cadence," said Erik Weisman, chief economist and portfolio manager at MFS Investment Management.
"The market will be looking for any hints that the Fed may be leaning towards another hike by year end or that a more persistent pause is in order."
In other currencies, sterling edged up 0.1% at $1.2398, ahead of an interest rate decision from the BoE on Thursday.
The Bank is expected to deliver another rate hike on Thursday, but this could be its last for now, as a cooling economy has policymakers unsettled.