SYDNEY (Reuters) - The yen sank to a fresh 2-1/2 year low against the greenback on Monday with investors giving the currency a wide berth in the lead up to a Bank of Japan meeting that could see the central bank commit to aggressive reflationary policy.
Facing relentless political pressure to pull the country out of deflation, the BOJ could consider making an open-ended commitment to buy assets until a 2 percent inflation target is in sight at its Jan 21-22 meeting.
The dollar rose to 90.25, edging past the previous high around 90.21 set Friday. Immediate resistance is seen near 90.34, the 76.4 percent retracement level of its 2010-2011 fall.
The euro bought 120.23 yen, not far off a 20-month peak of 120.73, while the Australian dollar was at 94.81, within easy reach of a four-year high of 95.02 set Friday.
"We expect the door for further easing will likely be left open irrespective of the outcome of BOJ policy meeting, either explicitly by the BOJ or implicitly through government's plan to nominate doves to replace the governor and deputy governors," analysts at Barclays Capital wrote in a client note.
"Expectations of an aggressive monetary policy stance under new BOJ leadership are likely to provide support for USD/JPY in coming weeks. A post-announcement dip, if any, would provide better a entry level to go long USD/JPY."
Data last Friday showed currency speculators slightly trimmed their bets against the yen in the week to Jan 15, although they remained overwhelmingly negative on the currency.
Traders said there has been strong demand for options betting on further yen weakness, with one-month dollar/yen implied volatility - a measure of expected price movement - rising to its highest since August 2011 on Friday.
One-month risk reversals showed rising demand for yen puts, or bets on the yen falling.
With all eyes on the BOJ, other currencies took somewhat of a backseat. The euro stood at $1.3323, having been capped by the $1.3400 level in the past week and facing strong resistance just under $1.3500.
Sterling slipped to a two-month low of $1.5838, remaining under pressure after an unexpected fall in retail sales last month raised the likelihood that the UK was slipping into its third recession in four years.
The Australian dollar, which came under a bit of profit taking late last week, continued to see good support under $1.0500. It was last at $1.0507, having bounced off a 1-1/2 week low of $1.0485 Friday.
There is little in the way of major economic news out of Asia, Europe and the United States on Monday, leaving the focus squarely on the BOJ.
Editing by Wayne Cole