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Dollar climbs, but caution reigns before Fed statement

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The dollar rose against a basket of currencies on Wednesday, recouping some of the previous day's sharp losses, on expectations the Federal Reserve is unlikely to deliver significant changes to its policy outlook.

Two-year Treasury yields held above 0.51 percent in European trade, providing support to the dollar. It fell on Tuesday after weaker-than-forecast corporate earnings and durable goods data.

The Fed's first two-day policy meeting of the year concludes on Wednesday, and policymakers will likely restate their "patient'' approach to raising rates, while also voicing faith that the economy will continue to pick up.

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While data such as consumer spending and home sales were more robust, some traders and investors are getting worried the Fed could turn more cautious in its guidance on future rate rises, given the plunge in oil prices is cooling inflationary pressures.

"The Fed is going to be patient and we could see investors price out chances of a near-term interest rate hike,'' said Peter Kinsella, currency strategist at Commerzbank, London. ``That could lead to short-term dollar weakness.''

The dollar index was up 0.3 percent at 94.27, having posted its biggest fall since early October on Tuesday. It was still below a 11-year high of 95.481 hit on Friday, having got a slight boost in Asia from a surprise monetary easing by Singapore that lifted the dollar against the Singaporean dollar and other Asian currencies.

Nevertheless, given investors have put in place a huge amount of long dollar bets since the second half of last year on expectations that the Fed will start raising rates this year as the U.S. economy recovers, there was an element of caution.

"I am a bit nervous that the dollar may have a further leg to go down if the Fed says something negative (about the U.S. economy), given that the market is still very long in the dollar on the whole,'' said Bart Wakabayashi, head of forex at State Street Bank.

Against the yen, the dollar fetched 118.05 yen, up about 0.2 percent and well below last week's high of 118.80.

The euro traded at $1.1340, having risen to $1.1423 on Tuesday, extending its rebound from an 11-year low of $1.1098 hit on Monday.