FOREX-Dollar near 4-week low as markets brace for modest Fed taper
* Dollar index hovers near four-week trough
* Fed likely to reduce stimulus modestly, sound dovish
* Currencies trade in tight ranges before Fed
LONDON, Sept 18 (Reuters) - The U.S. dollar held near a four-week trough against a basket of major currencies on Wednesday as investors bet that any move by the Federal Reserve to roll back stimulus will be modest.
The Fed's highly anticipated rate review ends later in the day and markets expect the central bank will probably announce a slight reduction to its $85 billion monthly bond-buying programme while stressing that interest rates will stay low for a while.
Indeed, since a disappointing U.S. non-farm payrolls report on Sept. 6, markets have scaled back expectations on the size of any pullback in stimulus.
Traders said currencies would stay in tight ranges as investors were unwilling to take fresh positions before the outcome of the Fed's policy review due at 1800 GMT. Chairman Ben Bernanke will give a news conference after that.
The dollar index was flat at 81.142, but still close to Monday's four-week low of 80.968.
"We expect the Fed to taper by $10 billion and some in the market are pushing for $15 billion. I think they are also going to try and push the message that rates aren't going to go up anytime soon," said Paul Bednarczyk, head of research at 4CAST.
He added that if the amount were less than $15 billion, then the dollar could be dragged lower.
Some analysts said there was a chance the Fed might pledge to keep rates low until the jobless rate falls to around 6.0 percent revising their previous threshold of 6.5 percent.
Benchmark U.S. 10-year Treasury yields were also lower at around 2.84 percent, below the 3.007 percent touched on Sept. 6, which was a more than two-year high.
The dollar was flat at 99.15 yen. A large reported options expiry at 99.00 yen could keep the pair pegged to that level.
The euro held steady at about $1.3354, hovering near a 2-1/2 week peak of $1.3385 reached on Monday. If that level is broken to the upside, chartists said the euro could test $1.3455 initially and then the $1.3600 area.
Traders said any delay to the tapering may be seen as dovish by markets and could prompt investors to sell the dollar. Conversely a bigger reduction of stimulus could be seen as hawkish, lifting demand for the greenback.
Roy Teo, FX strategist Asia at ABN AMRO Bank in Singapore, said the Fed could scale back its stimulus by $15 billion and also revise its forward guidance on interest rates by lowering the threshold for the unemployment rate.
He expected the dollar to rise against the yen over the next few months, as markets may start positioning for further monetary easing by the Bank of Japan.
"We have 110 (yen) for the end of the year," Teo said, referring to ABN AMRO's forecast for the dollar/yen. "Come the end of this year, we could see the market start to price in that the BOJ would further increase its monetary stimulus."