* Dollar softer against most currencies except the yen
* Fed & BOJ policy decisions in focus
* Aussie plunges after surprisingly soft Australian CPI
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, April 27 (Reuters) - The Australian dollar tumbled on Wednesday after surprisingly soft local inflation data, while the dollar and yen were on the defensive after a broad retreat overnight ahead of policy decisions by both the Federal Reserve and Bank of Japan.
The Australian dollar fell more than 1 percent to $0.7672 AUD=D4 after data showed Australia's consumer prices unexpectedly fell 0.2 percent in January-March, undershooting median forecast of a 0.3 percent rise.
It was the first time since 2009 the inflation gauge fell to a negative level, raising speculation that the Reserve Bank of Australia may have to consider rate cuts.
"The underlying rate of inflation has slowed considerably and Australia's CPI rates are finally starting to look more like its developed market peers. This won't sway the RBA to lower the cash rate next Tuesday, but it will keep their easing bias in play for a while," said Jasmin Argyrou, Aberdeen Asset Management senior investment manager in Sydney.
The Aussie had risen almost 15 percent earlier this month from its near seven-year low touched in January, thanks to recovery in commodity prices, but rising expectations of a rate cut could halt the rally.
"The RBA has been nervous about a strength in the Australian dollar. So a rate cut would be a natural option. The Aussie's rally could reverse its course," said Yukio Ishizuki, forex strategist at Daiwa Securities.
"On the other hand, iron ore prices have surged this year, so given their correlation, that should prevent the Aussie from falling fast," he added.
Dalian iron ore futures DCIOcv1 hit a 20-month high on Monday, though they have been retreating since then.
Other major currencies were mostly stable in Asia with dollar bulls seeming to suspect the Fed will sound dovish again, even though a rise in U.S. Treasury yields to five-week highs suggested other investors were primed for a more hawkish tone. The BOJ, on the other hand, could ease further.
That saw the euro outperform. It was back up at $1.1309 EUR= , pulling further away from a trough of $1.1216 set earlier in the week.
Against the yen, the common currency scaled a three-week peak just shy of 126.00 EURJPY=R and last stood at 125.76.
The greenback held at 111.18 yen JPY= after reversing from 110.67.
Sterling, which climbed to a near three-month high of $1.4640 GBP=D4 on Tuesday, last stood at $1.4580.
The Fed is considered certain to keep rates steady later on Wednesday, so the focus rests squarely on the tone of its statement. Traders said policymakers may be wary of sending too strong a message of an imminent policy tightening, particularly after another batch of disappointing data. while the FOMC will leave its policy options wide open and stress data dependent, there is likely to be little in the way of catalysts for a repricing for a June rate hike," analysts at BNP Paribas (PA:BNPP) wrote in a note to clients.
Such an outcome would leave the dollar vulnerable to more weakness against the euro and yen, they added.
Hours after the Fed, the BOJ will step up to the plate.
Many market players expect the BOJ to take some form of easing measures, including an increase in purchase of stocks and a cut in interest rates.