US dollar banknotes.  (Reuters Photo)

SINGAPORE- The dollar wavered on Wednesday, while the yen regained some lost ground as investors made last-minute tweaks to positions ahead of a policy meeting expected to begin a US easing cycle.

The Federal Reserve is expected to make its first interest rate cut in more than four years, with markets pricing a 2/3 probability of a 50 basis point cut.

The dollar has fallen along with US yields since July and at $1.1119 per euro is not far from the year’s low at $1.1201 in anticipation of US easing at a clip, with more than 100 basis points of rate cuts priced in by Christmas.

The yen, up more than 12 percent  since July, has been surging because the Bank of Japan – which sets policy on Friday – has been hiking rates at the same time as the Fed prepares to cut.

It rose about 0.7 percent  to 141.41 per dollar on Wednesday, recouping part of an overnight drop. The yen was up 0.6 percent  to 157.24 per euro

Elsewhere, the Australian dollar briefly touched a two-week top at $0.6773, while a rise in milk prices supported the New Zealand dollar at $0.6196, though moves were tentative ahead of the Fed’s meeting.

Traders say the Fed’s tone as well as the size of the rate cut will drive the reaction in the foreign exchange market.

“A dovish Fed on a substantial easing path should generally lead to a weaker dollar,” said Nathan Swami, head of currency trading at Citi in Singapore.

But an extremely dovish Fed, Swami said, could end up spooking markets if it seems it anticipates a more ominous downturn in the economy than is expected, and in that case risk-sensitive and emerging market currencies may face headwinds.

US retail sales unexpectedly rose 0.1 percent  in August, data showed overnight, against forecasts for a 0.2 percent  contraction and the Atlanta Fed’s closely-followed GDPNow estimate was raised to 3 percent  from 2.5 percent , supporting perhaps a case for a smaller Fed cut.