By Rae Wee

SINGAPORE (Reuters) – The euro clung to gains on Tuesday following hawkish comments from European Central Bank (ECB) policymakers, while the yen languished near a 10-month low ahead of a key rate decision from the Bank of Japan (BOJ) later in the week.

Currency moves were subdued in early Asia trade as markets stayed on guard ahead of this week’s slew of central bank meetings, with the Federal Reserve taking centre stage and the BOJ grabbing the spotlight in Asia.

The euro eked out a slight gain to trade at $1.0695, having risen 0.3% in the previous session as ECB officials suggested further rate increases were on the cards – comments which boosted euro zone government bond yields.

“With ECB speak noting how inflation is not expected to come down anytime soon… we should all be gearing to this idea that the cash rate will remain elevated for an extended period of time, and potentially a very long period of time,” said Rodrigo Catril, senior FX strategist at National Australia Bank.

A Reuters report saying the ECB may soon start discussing how to tackle the multi-trillion-euro pool of excess liquidity sloshing around banks also lifted the single currency.

This stash of money 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.

In Asia, the yen slipped marginally to 147.64 per dollar and was kept pinned near last week’s 10-month low of 147.95 per dollar.

The BOJ is due to announce its rate decision on Friday at the conclusion of its two-day policy meeting, with the central bank coming under close scrutiny after Governor Kazuo Ueda stoked speculation of an imminent move away from ultra-loose policy.

“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 Catril.

“And we think that 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.”

Elsewhere, the U.S. dollar edged broadly lower, though strayed not too far from a six-month peak hit against its major peers last week ahead of the Fed’s interest rate decision on Wednesday.

Against the greenback, the Aussie rose 0.12% to $0.6445, while the New Zealand dollar gained 0.11% to $0.5924.

The dollar index slipped 0.04% to 105.04.

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.”

Sterling edged 0.04% higher to $1.2390, ahead of an interest rate decision from the Bank of England (BoE) also due this week.

While the BoE is expected to deliver another rate hike on Thursday, the increase could mark the central bank’s last in its current tightening cycle as a cooling economy begins to worry policymakers.

(Reporting by Rae Wee; Editing by Lincoln Feast.)

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