By Brigid Riley

TOKYO (Reuters) -The yen struggled to hold its line against the dollar on Tuesday after making sharp gains the previous day sparked by suspected intervention by Japanese authorities.

The currency inched down 0.30% to 156.79 per dollar but was well off its 34-year low of 160.245 hit on Monday when traders say yen-buying intervention by Tokyo drove a eye-catching rebound of nearly six yen. It briefly popped above 157 earlier in Tuesday's session.

Japanese authorities haven't confirmed that they had stepped into the currency market in support of the yen, but markets remain on heightened intervention alert ahead of the Federal Reserve's monetary policy review this week.

Official figures that would reveal whether intervention did in fact occur won't be available until late May.

While some market players had zeroed in on 160 yen per dollar as the possible trigger for intervention, analysts said Japanese authorities may not be targeting particular levels.

"Obviously, the still wide policy rate gulf between the Fed and BOJ could continue to keep USD/JPY buoyant. For that reason, we believe Japanese officials desire more flexibility in terms of what levels to intervene at," said Wei Liang Chang, a currency and credit strategist at DBS.

Despite the yen's biggest one-day gain this year on the dollar, the Japanese currency still sits lower than it was before the Bank of Japan's (BOJ) policy announcement last week. It has also suffered its largest monthly decline since January.

The BOJ's go-slow approach on interest rate increases, following its landmark decision to ditch negative rates in March, has traders betting that Japanese bond yields will remain low for an extended period. In contrast, U.S. rates are still relatively high and provide enough latitude for yen bears.

The Fed begins its two-day monetary policy meeting on Tuesday, where it's expected to hold rates at 5.25%-5.5%, with U.S. inflation proving to be sticky.

It's also expected to strike a hawkish message, meaning more yen selling is likely, said Carol Kong, a currency strategist at the Commonwealth Bank of Australia (OTC:CMWAY).

"The implication is the MOF will likely be forced to step in more than once to slow the rise in USD/JPY."

DIVERGENT ECONOMIC OUTLOOKS

While the timing of any possible rate hikes by the BOJ remains vague, traders continue to pare back bets of Fed rate cuts this year amid hotter-than-expected U.S. economic data and stubborn inflation numbers.

A rate cut in September was looking like a close call at just 44%, according to CME Group's (NASDAQ:CME) FedWatch tool.

The dollar rose to 0.14% to 105.83 against a basket of currencies ahead of the Fed's meeting, after slipping 0.25% in the previous session.

However, other major central banks such as the European Central Bank (ECB) and the Bank of England may begin to cut rates in the near future.

Markets could glean more clues on the timing of ECB's rate-easing cycle from European inflation data this week due later on Tuesday.

The euro fell 0.17% to $1.0701. Sterling was last trading at $1.2541, down 0.16% on the day.

Elsewhere, a soft retail sales number out of Australia sent the Aussie sliding, last down 0.53% at $0.653, as markets further trimmed the risk of another rate hike by September.

The kiwi fell 0.50% to $0.595.

In China, manufacturing and services activity both expanded at a slower pace in April, official surveys showed, suggesting some loss of momentum for the world's second-biggest economy at the start of the second quarter.

The offshore Chinese yuan slipped 0.14% to $7.2523 per dollar.

The yuan has lost 2% against the dollar so far this year and is on course for its fourth straight monthly onshore loss.

In cryptocurrencies, bitcoin last rose 1.07% to $63,618.00.