LONDON, Jan 24 (Reuters) - The dollar dropped on Wednesday as the yen jumped on expectations that Japan's ultra-easy monetary policy will soon end, while the euro, sterling and yuan also rallied.
The dollar was down 0.69% against the Japanese currency at 147.36 yen to the dollar.
The yen rally followed Japanese bond yields , which leapt to six-week highs. Bank of Japan chief Kazuo Ueda said on Tuesday that the prospects of achieving the central bank's inflation target were gradually increasing, adding to expectations that the country might soon leave behind its ultra-loose monetary policy.
"Ueda's comments have given the market a little more confidence that April is definitely a live date for a potential exit from the current policy," said Ray Attrill, head of FX research at National Australia Bank.
Strong Japanese export data on Wednesday added to the positive mood.
The euro was last up 0.36% at $1.0893 after falling 0.27% on Tuesday.
It extended its rise after purchasing managers' index (PMI)surveys showed that the euro zone economy's downturn eased somewhat in January although it remained sluggish.
The dollar index was down 0.35% at 103.14, reversing the previous two days' 0.26% increase.
It is up around 1.8% this year as stronger-than-expected data and push back from central bankers has caused the market to rein in its expectations for rapid Fed cuts this year.
Francesco Pesole, foreign exchange strategist at ING, said China's announcement that it will cut the amount of cash banks must hold as reserves in early February, in an attempt to boost lending and the economy, was also helping the euro.
"The euro zone is highly dependent on China so it normally tends to have a good correlation with whatever happens (there)," he said.
The onshore yuan strengthened after the announcement , touching an almost two-week high of 7.155 to the dollar.
Sterling also climbed after a strong PMI reading caused traders to further dial back their bets on Bank of England rate cuts this year, a process that was kick-started by a stronger-than-expected inflation reading earlier this month.
Sterling was last 0.39% higher at $1.2735. The euro slipped to its lowest against the pound since early September at 85.36 pence as investors digested the differing survey data.
"The market is not really comfortable pricing in more easing from the Bank of England," said Pesole.
Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said that on a zoomed-out view, little had changed in currency markets over the last week.
"The dollar index currently is literally almost unchanged since last Wednesday," he added. "In many ways it's following U.S. rates (bond yields) which have also been chopping around... FX and rates markets are waiting for the next catalyst."
The European Central Bank sets interest rates on Thursday and could give hints about when euro zone borrowing costs might start falling. The Fed sets rates on Wednesday next week, followed by the Bank of England on Thursday.
Investors were also waiting for U.S. PMIs and a Canadian interest rate decision at 1445 GMT (9.45 a.m. ET).
The U.S. rate futures market priced in a roughly 52% chance of a March rate cut, up from Tuesday but down from as much 80% about two weeks ago, according to LSEG data.
U.S. bond yields were down slightly on Wednesday after rising the previous day, while European stocks and U.S. futures were higher as the fresh Chinese stimulus helped brighten the mood.
Reporting by Harry Robertson in London; additional reporting by Kevin Buckland in Tokyo; Editing by Christopher Cushing, Kim Coghill, Sharon Singleton and Emelia Sithole-Matarise
