FOREX-Dollar edges lower before expected Fed hike

The yen has been in the midst of its most promising rally for months on a combination of a hawkish shift in expectations for Japanese interest rates, joint intervention by Japan and the U.S. and talk of Japanese investors repatriating capital.

Traders see an 80% chance that the Bank of Japan hikes rates on Friday, LSEG data show, and have priced in two 25-basis-point hikes by the end of January.

"The yen's path will continue to depend heavily on interest rate differentials," David A. Meier, economist at Julius Baer, said in a research note.

"We recently revised our USD/JPY forecasts to 155, reflecting some scepticism that the central bank can ultimately satisfy the pace of tightening currently priced in by markets," he added.

A long rally in China's yuan has lost momentum at around 6.71 to the dollar, but the currency is holding its gains despite a widening gap between low Chinese yields and rates elsewhere.