(Updates prices at 0615 GMT)
The yen stood firm on Monday as the Bank of Japan (BOJ) kicked off its two-day monetary policy meeting, with traders awaiting a decision on whether the dovish central bank could finally unwind its ultra-loose policy settings.
In the broader market, the U.S. dollar started the week on the back foot, extending its fall from last week in the wake of the Federal Reserve's policy meeting which signalled the possibility of interest rate cuts next year.
The yen JPY=EBS steadied at 142.25 per dollar, after gaining nearly 2% last week on the back of the dollar's decline.
The Japanese currency has had a volatile few weeks as markets struggle to get a grip on how soon the BOJ could phase out its negative interest rate policy, with comments from Governor Kazuo Ueda this month initially sparking a huge rally in the yen.
That was later reversed on news that a policy shift was unlikely to come as early as December, and investors now await Tuesday's BOJ decision for further clarity on the bank's rate outlook.
"The meeting will be relevant and important in terms of what the BOJ does, and there are some in the market that still expect that maybe there's a surprise," said Rodrigo Catril, senior FX strategist at National Australia Bank.
Against the euro, the yen EURJPY=EBS edged more than 0.2% lower to 155.27, but was not too far from a four-month top of 153.215 per euro hit earlier this month. Sterling was little changed at 180.44 yen GBPJPY=EBS .
RATE CUTS LOOM? Elsewhere, the dollar edged broadly lower and was pinned near roughly five-month lows on the Australian and New Zealand dollars.
The Aussie AUD=D3 rose 0.37% to $0.6727, not far from last week's peak of $0.6728, while the kiwi NZD=D3 jumped 0.6% to $0.6244.
The market mood stayed buoyant on the prospect that the Fed could begin easing rates early next year, with futures pricing in a roughly 75% chance the first cut could come as early as March, according to the CME FedWatch tool.
The greenback, which has for most of 2022 and 2023, drawn support from a slew of aggressive rate hikes from the Fed and expectations of higher-for-longer rates, was last 0.17% lower at 102.45 against a basket of currencies =USD .
The dollar index tumbled roughly 1.3% last week. "The Fed has officially opened the door to the next cycle of rate cuts," said Franck Dixmier, global chief investment officer for fixed income at Allianz Global Investors.
"While the Fed may have been criticised for taking too long to raise rates, it clearly has no intention of wasting any time in lowering them."
The European Central Bank (ECB) and Bank of England (BoE) likewise kept interest rates steady at their respective policy meetings last week, though unlike the Fed, both pushed back against expectations of imminent rate cuts.
"(ECB President) Christine Lagarde has made it clear that rate cuts weren't on the table, marking a stark contrast to the Fed's approach, which remains intensely focused on the growth risks associated with maintaining higher rates for an extended period," said Monica Defend, head of Amundi Investment Institute.
"This divergence is particularly notable given the euro zone's recent weaker economic performance and more rapid disinflation compared to the U.S. Meanwhile, the (BoE) maintains a cautious stance, showing no indication of deviating from its 'higher-for-longer' policy."
Sterling GBP=D3 rose 0.08% to $1.2690, while the euro EUR=EBS gained 0.22% to $1.0916.
The single currency, however, continues to be weighed by a darkening growth outlook in the euro zone, with data last week showing the downturn in the bloc's business activity surprisingly deepened in December, indicating its economy is likely in recession.
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