By Stanley White
TOKYO (Reuters) - The dollar traded near the highest in more than two months versus the yen on Monday ahead of a U.S. Federal Reserve meeting this week where policymakers are expected to cut interest rates but emphasize their reluctance to ease policy further.
Sterling edged lower versus the dollar and the euro, with an agreement expected later on Monday to delay Britain's divorce from the European Union to Jan. 31 after Prime Minister Boris Johnson failed to win approval for his Brexit timetable.
The market focus will shift to the Fed meeting ending Oct. 30 and a Bank of Japan meeting ending Oct. 31. The Fed is expected to cut interest rates for a third time this year, but fixed income analysts say this is largely priced into the market.
The BOJ is leaning toward keeping policy on hold next week, but the decision is a close call as policymakers struggle with threats to the global outlook from the U.S.-China trade war and Brexit.
"A Fed rate cut is already factored in, but the dollar could be bought back if the Fed somehow signals it won't cut rates further," said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities in Tokyo.
"Until we can confirm this, traders are likely to adjust their existing positions in the dollar."
The dollar traded at 108.72 yen on Monday, close to 108.94 yen, which is the highest since Aug. 1.
The greenback (EUR=EBS) was quoted at $1.1084 per euro, close to its strongest in more than a week.
The dollar index (DXY) against a basket of six major currencies stood at 97.827, also near its highest in more than a week.
The U.S. currency got a mild boost on Friday after the U.S. Trade Representative's office said it is "close to finalizing" some parts of a trade agreement with China.
On Saturday China's Ministry of Commerce said "technical consultations" on some parts of a trade agreement were basically completed, but investors are likely to remain skeptical because even a partial deal would not eliminate risks posed by trade friction.
In the offshore market, the yuan edged to 7.0450 per dollar on Monday, the strongest since Sept. 13, but investors are likely to take their cue from how the yuan trades onshore when the market opens around 0130 GMT.
The Fed meeting this week is widely expected to result in a cut in interest rates of 25 basis points, and that has been priced in, but some analysts expect the Fed to sound "hawkish" by signaling it is reluctant to cut rates further.
The pound edged lower to $1.2828 and eased slightly to 86.42 pence per euro (EURGBP=D3).
The EU bloc's 27 ambassadors will meet at 0900 GMT on Monday in Brussels to agree on a three-month delay from the current Brexit date of Oct. 31, diplomatic sources told Reuters.
More than three years after Britons voted in a referendum to quit the EU, the country and its parliament remain divided over how, when and even whether to leave, and the matter has triggered a spiraling political crisis in the UK.