By Ellie Ismailidou, MarketWatch , Hiroyuki Kachi

Investors are expected to largely sit on the sidelines before central bank meetings

The dollar on Monday hovered near the four-month high as investors braced for monetary-policy decisions by the Federal Reserve and the Bank of Japan later this week.

Though the Fed is widely expected to hold interest rates steady at the end of its two-day meeting on Wednesday, the anticipation of a more hawkish U.S. central bank appeared to be behind the dollar's recent strength, analysts said.

"It is finally sinking in that domestic fundamentals in the U.S. are painting a better picture of the economy than what we saw post-Brexit and even pre-Brexit," said Juan Perez, a currency trader at Tempus Inc., referring to the U.K.'s June 23 vote to leave the European Union.

Recent economic data, including an upbeat reading of U.S. manufacturing released Friday, "cemented the idea that the dollar's strength has reasons behind it--it's not just speculation, but rather the difference in economic fundamentals between the U.S. and the EU," Perez said.

The ICE U.S. Dollar Index , a measure of the buck's strength against a basket of six rival currencies, pulled back slightly to 97.34, from 97.37 late Friday. The index traded as high as 97.57 in European trading hours, its highest level since March 10, according to FactSet data.

The greenback inched lower against the yen, as investors were reluctant to move aggressively ahead of the monetary policy meetings in the U.S. and Japan later this week.

The U.S. dollar fetched Yen105.99 in recent action, compared with Yen106.15 late Friday in New York. The euro was changing hands at Yen116.38, slightly higher than Yen116.50 late Friday.

The greenback briefly touched a high of Yen106.74 in Asian trade, suggesting strong appetite among Japanese importers and other corporate players for dip buying of the dollar for regular commercial trade settlement, but later pulled back.

J.P. Morgan, which expects a further cut in rates and increased asset purchases by the Bank of Japan, said in a note that the dollar will likely follow a pattern of "buy the rumor, sell the news," against the yen.

Analysts at J.P. Morgan noted that when the BOJ decided to stand pat in March and June, the dollar fell 0.8% and 1.7%, respectively against the yen. Most traders had expected the central bank to stand pat on both those occasions.

J.P. Morgan said the monetary action alone may not be enough to pull down the yen, particularly as Japan's trade surplus is staring to widen. Moreover, a mere conventional easing won't deliver any kind of positive surprise, it said.

Overall, investors are expected to largely sit on the sidelines before the Federal Open Market Committee meeting on July 26-27 and the BOJ's policy setting meeting on July 28-29.

Read:Wall Street braces for feeding frenzy of earnings, central-bank action (http://www.marketwatch.com/story/wall-street-braces-for-feeding-frenzy-of-earnings-central-bank-action-2016-07-23)

"There's no aggressive buying ahead of the events this week. It seems profit-taking was kicking in, as Tokyo stocks weakened," said Yuzo Sakai, manager of FX business promotion at Tokyo Forex & Ueda Harlow.

"We would see similar moves again tomorrow," Sakai said. "But many investors seem to have been hesitant to sell (the safety of) the yen," given recent uncertainties such as a shooting in Germany last week, said Sakai.

Investors shrugged off the Group of 20 finance ministers and central bankers meeting over the weekend which redoubled their commitments to use all available policy tools to boost economic growth.

Read: Europe's problems eclipse China on G-20's agenda (http://www.marketwatch.com/story/europes-problems-eclipse-china-on-g-20s-agenda-2016-07-24)

The G-20 also reiterated its commitment to avoid using exchange rates to gain a competitive advantage and to consult closely on exchange-rate policy.

In other currency trade pairs, the euro inched higher at $1.0985 from $1.0976 late Friday.

(END) Dow Jones Newswires

July 25, 2016 12:46 ET (16:46 GMT)

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