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(Bloomberg) — The dollar declined for a second day against the yen amid speculation the Federal Reserve will refrain from increasing its benchmark interest rate this week.

A gauge of the greenback reached a two-week low before the Federal Open Market Committee’s rate-setting meeting Sept. 16-17. U.S. consumer prices fell in August from a month earlier, according to economists’ estimates before data due Sept. 16. The yen strengthened as all but two of 35 analysts surveyed by Bloomberg predicted the Bank of Japan will maintain its policy stance at its meeting Tuesday.

“The market is taking a relatively dovish view on the FOMC,” John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark, said by e-mail. “There could be a bit more room for U.S. dollar downside ahead of the FOMC, particularly in dollar-yen if risk appetite remains weak.”
The greenback weakened 0.2 percent to 120.38 yen at 8:47 a.m New York time. The Japanese currency appreciated 0.5 percent to 136.03 against the euro. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed at 1,204.72 after reaching the weakest level since Sept. 1.
Volatility in foreign exchange markets remains near a seven-month high, according to JPMorgan Chase & Co.’s gauge of price swings in currencies.

Fed Chance
“We’re probably going to run in small, inconclusive ranges all day today and in the run-up until Thursday,” said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. “You’re not going to see anything decisive in the currency markets until this Fed meeting.”
Futures show a 30 percent chance the Federal Open Market Committee will raise rates on Sept. 17. The probability was 38 percent on Aug. 31. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

The Fed will likely keep interest rates unchanged on Thursday and signal that “liftoff is near,” Goldman Sachs Group Inc. analysts, including Robin Brooks, the chief currency strategist in New York, wrote in a report dated Sept. 13. There is a risk that there will be a “dovish shift in the projections and, potentially, in the language” from Fed Chair Janet Yellen during the press conference, according to the report.
The U.S. consumer price index fell 0.1 percent in August after a 0.1 percent gain the month before, according to economists surveyed by Bloomberg before a Labor Department report on Sept. 16. That would be the first negative reading since January.

The yen has climbed 6.8 percent in the past three months, the most among its peers in Bloomberg Correlation-Weighted Indexes, as equity markets fell and concern deepened about slowing global growth. The euro advanced 4.3 percent in the period, while the dollar has climbed 3.8 percent.
The BOJ will expand easing on Oct. 30, according to 11 economists in a Bloomberg survey conducted Sept. 7-10. Of the total respondents, 13 said they didn’t expect any new stimulus at all.
Hedge funds and other large speculators trimmed bets on yen weakness versus the dollar for a fourth week. The difference in the number of wagers on a drop compared with those on a gain — net shorts– was 6,662 on Sept. 8, from 15,555 a week earlier, according to data from the Washington-based Commodity Futures Trading Commission.

–With assistance from Candice Zachariahs in Sydney, Lucy Meakin in London and Netty Ismail in Singapore.

To contact the reporters on this story: Lananh Nguyen in New York at lnguyen35@bloomberg.net; Jennifer Surane in New York at jsurane4@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Paul Cox, Michael Aneiro