FOREX-Yen rallies as Japan floats chance of joint intervention with US

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U.S. economic data delays Fed rate cut expectations

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Japanese markets brace for snap election and central bank policy meeting

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ECB chief economist Lane warns of potential shocks affecting rate policy

(Recasts with yen gain on finance minister comments)

By Rocky Swift

TOKYO, Jan 16 (Reuters) - The yen rallied against the dollar on Friday after Japan's finance minister floated the possibility of joint intervention with the United States to defend the nation's faltering currency.

Japanese Finance Minister Satsuki Katayama said she "won't rule out any options" to counter weakness in the yen, which slid to a 1-1/2-year ?low earlier in the week. The greenback was still poised for a third weekly gain after positive U.S. economic data pushed out expectations for rate cuts by the Federal Reserve.

Markets in Japan are on ?edge before a pivotal week that will see fiscally dovish Prime Minister Sanae Takaichi dissolve parliament to set up a snap election while the ?central bank meets on policy. Some Bank of Japan policymakers see scope to raise interest rates sooner than markets ?expect to contend with the weak ?yen, sources told Reuters.

"As we get very close to intervention, sometimes we see comments around the Ministry of Finance or officials from Japan asking or checking about prices on the yen with counterparties," said ?ANZ foreign exchange strategist Felix Ryan. "The relevance of those comments comes down to ?the level of dollar-yen and also how fast it moves within a 24-hour period."

The dollar-yen rate jolted 0.4% lower to just below the 158 level after Katayama's latest comments on potentially stepping into the market. Speaking at a regular news conference, ?she said a joint statement signed with the U.S. last September "was extremely significant and ?included language on ?intervention."

The yen strengthened 0.3% to 158.22 per dollar, still poised for a 0.2% decline on the week.

The dollar index, which measures the greenback against a basket of currencies, was little changed at 99.31 and on track for a 0.2% advance this week. The euro ?was steady at $1.1607.

The dollar climbed in the previous session after data showed that U.S. initial claims for unemployment benefits dropped 9,000 to a seasonally adjusted 198,000 for the week ended January 10. Economists polled by Reuters had forecast 215,000 claims for the latest week.

Fed funds futures have pushed back expectations for the next rate cut to June on the back of improving employment data and as central bank policymakers expressed concern about inflation.

"The U.S. dollar is looking firmer to start the year," Kyle Rodda, an analyst at Capital.com, wrote in a note. "Weekly U.S. jobless claims data, along with some manufacturing surveys, were better than ?expected, lowering the ?implied probabilities of imminent Fed rate cuts."

Separately, the European Central Bank will not debate any rate change in the near term if the economy stays on course, but new shocks, like a potential deviation by the Fed from its mandate, could upset the outlook, ECB ?chief economist Philip Lane said.

The ECB has kept rates on hold since ending a rapid rate cut cycle in June and signalled last month that it was in no hurry to change policy again.

The Japanese currency has fallen on expectations that Prime Minister Takaichi may have greater leeway to introduce more stimulus pending a snap election expected early next month.

The yen has gotten little help from expectations of rate hikes by the BOJ. The central bank will likely wait until July before raising its key interest rate again, economists said in a Reuters poll released on Thursday.

But many BOJ policymakers see scope for further rate hikes, with some not ruling out the chance of ?action in April, sources said.

The looming election is fuelling yen weakness and a slide in Japanese government bonds due to "fears of aggressive fiscal expansion," said Tony Sycamore, a market analyst at IG.

"The recent selloff in the JPY towards the key 160 level brings the Japanese Ministry of Finance significantly closer to actual intervention," he wrote in a note.

The Australian dollar strengthened 0.1% versus the greenback to $0.6702. ?New Zealand's kiwi advanced 0.2% to $0.5752.

In cryptocurrencies, bitcoin fell 0.1% to $95,476.51 and ether rose 0.1% to $3,302.48. (Reporting by Rocky Swift; Editing by Edwina Gibbs and Shri Navaratnam)