*Yen soft on Nikkei report that BOJ may take bold steps
*Aussie eyes RBA, market expects 0.25% rate hike
*Brazil raises tax to curb capital inflows
*Dollar index off 8-month low after profit-taking
By Hideyuki Sano
TOKYO, Oct 5 (Reuters) - The yen eased on Tuesday after the Japanese business daily Nikkei reported that the Bank of Japan may announce easing measures that go beyond initial expectations when its policy meeting ends later in the day.
The Australian dollar held firm near a two-year peak as the market expects the Reserve Bank of Australia to raise interest rates by 0.25 percentage point to 4.75 percent, although a rate rise is not fully priced in.
"The Australian dollar will probably gain if the RBA raises rates as expected. But since the market has been already pushing up the currency on the rate hike story, its momentum may not last long," said a trader at a Japanese brokerage house.
The dollar rose about 0.3 percent against the yen to around 83.60 yen.
The Nikkei said the BOJ will consider expanding its asset purchases including government bonds and asset-backed securities.
As the market had been expecting less aggressive measures, such as expanding its money market operations, the dollar could rise further against the yen if the BOJ does increase its purchase of government bonds.
If the BOJ only tweaks its money market operations and shuns larger asset purchases, the dollar/yen rate may fall on disappointment, although wariness about Japanese intervention could keep the pair afloat especially during Asian trading hours.
INTERVENTION EXPECTATIONS
In the past few sessions, the currency has been supported around 83.15 yen, as some market players expect Japanese authorities to intervene around that level.
Japan sold the yen for first time in six years in the market on Sept. 15 when the dollar hit a 15-year low of 82.87 yen.
The Australian dollar fetched $0.9676, unchanged on the day but not far from a two-year high of $0.9751 hit late last week.
The market is priced for a 74 percent chance of a move on the RBA's recent hawkish remarks on the back of a robust Australian economy.
The RBA announces its decision at 0330 GMT. If it does hike, the focus will be on the statement to see if it leaves the door open for more tightening. If there is no move, it could spark a sharp selloff in the Aussie.
But a trader at a Japanese brokerage house also said risk currencies such as the Aussie could face pressure after Brazil unveiled plans to double a tax on foreign investments in local fixed-income securities to curb a rally in the Brazilian real.
The move came after Brazilian Finance Minister Guido Mantega warned of a "currency war" last month.
With Brazilian interest rates among the world's highest, foreign investors are pouring cash into the South American country in search of steep returns.
The Brazilian real and the Australian dollar have had a high correlation in recent years, with their three-month correlation now above 0.9.
The euro fell 0.2 percent to around $1.3660, extending losses after it hit a 6 1/2-month high around $1.38, as market players took profits from its rally since early September.
The euro had rallied against a broadly weakening dollar on expectations that the U.S. Federal Reserve will wade into quantitative easing.
The dollar index also rose 0.2 percent to 78.57, a touch above its eight-month low of 78.029. (Reporting by Hideyuki Sano; Editing by Edmund Klamann)