* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* Dollar holds onto gains versus yen
* Saudi Arabia taps reserves to ease oil supply shocks
* Fed money market operation unsettles futures pricing
* Sterling grinds higher but sentiment still weak
(Adds spike in dollar repo rates)
By Stanley White
TOKYO, Sept 18 (Reuters) - The dollar traded near a
seven-week high versus the yen on Wednesday as oil markets
slowly recovered from a supply shock, but markets were cautious
ahead of a U.S. Federal Reserve meeting later in the day that is
expected to deliver another interest rate cut.
Sterling traded near a six-week high versus the dollar as
some speculators scaled back bearish bets on the pound, but
sentiment remained weak due to uncertainty over how Britain will
exit the European Union.
With investors largely pricing in a quarter-point rate cut
by the Fed, the focus will be on how much more easing it signals
for this year and next. Some analysts warn that the dollar could bounce if the Fed
does the minimum that markets expect.
"Speculators are already excessively short the dollar," said
Yukio Ishizuki, foreign exchange strategist at Daiwa Securities
in Tokyo.
"If there are no surprises from the Fed, the speculators
will have to give up their dollar shorts. The biggest reaction
would be in dollar/yen."
The dollar traded at 108.20 yen JPY=EBS on Wednesday,
close to a seven-week high of 108.37 yen.
The pound GBP=D3 was quoted at $1.2487, holding onto a
0.6% gain from Tuesday, when it briefly touched the highest
since July 19.
Oil prices edged lower in Asia, extending a 6% tumble on
Tuesday after Saudi Arabia's energy minister said the kingdom
has tapped inventories to restore oil supplies to where they
stood before drone attacks over the weekend shut around 5% of
global oil output. IN U.S. BORROWING COSTS
A surge in overnight U.S. borrowing costs also supported the
dollar.
Overnight borrowing costs in the $2.2 trillion repurchase
agreement market spiked to 10% on Tuesday as lending dwindled
due to huge corporate tax payments and the settlement of $78
billion of Treasuries sold last week.
The repo market allows banks and Wall Street dealers use
securities as collateral to obtain cash from money market funds
and other cash investors.
The New York Fed responded by injecting $53.15 billion into
the financial system with overnight repos, a money market
operation it has not used in more than a decade. The New York Fed later said in a statement it will conduct
another repo operation on Wednesday for up to $75 billion.
The spike in short-term rates shows there is a shortage of
dollar liquidity in the U.S. repo market, but some investors and
analysts are also worried about a shortage of dollars in the
offshore market.
Some traders say are monitoring cross-currency basis swaps
JPYCBS3Y= , which are starting to widen in a sign of higher
costs for dollars.
"This problem will come up again in a week or two because
there will be strong demand for dollars at the end of September,
which is the end of the third quarter," said Akira Takei, a
global fixed income fund manager at Asset Management One in
Tokyo.
"We better prepare for a rainy day. Difficulty in funding
dollars could lead to another sell-off in Treasuries."
The chaotic moves in money markets and late-day swings in
U.S. federal funds futures mean the CME's FEDWATCH tool shows
about a 51% chance that the Fed will cut rates by 25 basis
points on Wednesday, which is at odds with economists' and
market expectations. Elsewhere in the currency market, the euro stood at $1.1065
EUR=EBS , little changed in Asian trade.
The Australian dollar fetched $0.68485 AUD=D3 , down 0.27%.
The dollar index .DXY measuring the greenback against a
basket of six major currencies fell 0.03% to 98.288.
After the Fed releases its policy decision, traders will
turn to the Bank of Japan's meeting ending on Thursday to see if
it follows its global peers by easing policy.
Deepening negative rates will be the key option if the BOJ
were to ease, although the central bank may accompany that with
measures to mitigate the pain on financial institutions, sources
have told Reuters. (Editing by Jacqueline Wong & Kim Coghill)