Dollar on firmer footing before Fed outcome

[March 16, 2016]  By Anirban Nag

LONDON (Reuters) - The dollar climbed against a basket of currencies and rose against the yen on Wednesday, as investors positioned for fresh guidance from the Federal Reserve on when U.S. interest rates are likely to rise.

The dollar index rose 0.25 percent to 96.874, pulling further away from one-month low of 95.938 set last Friday. It was 0.3 percent higher against the yen at 113.55. The euro was 0.2 percent lower at $1.10855.

No policy action is expected from the Fed, but the market will be sensitive to any guidance on its next change in interest rates. Any signal that more than one increase is in store this year will help the dollar. Anything dovish could keep the dollar pinned down.

Interest rate futures are pricing in about a 50 percent chance of a quarter-point increase in June. The focus will also be on the Fed's forecasts for future rises, which is still pointing to four rate hikes until December.

"I am expecting them to be slightly more hawkish, given calmer stock markets, higher oil prices and a recent tick up in inflation in the U.S.," said Niels Christensen, a currency strategist at Nordea. "They should signal a rate hike in June and that should see the dollar edge up."

Traders said the dollar was also being boosted against the yen by comments from the Bank of Japan chief and by better risk appetite, with European stock markets trading higher.

BOJ Governor Haruhiko Kuroda said on Wednesday the bank has room to cut rates to around minus 0.5 percent from the current minus 0.1 percent. Suspicion had been growing that criticism of January's decision to adopt negative rates would stop him from pursuing the policy.

On Tuesday, the BOJ skipped a chance to expand its massive asset-buying program but offered a bleaker view of the economy. Some traders said the combination cast a shadow on risk sentiment, which bolstered demand for the safe-haven yen.

Speculation is also rising that Prime Minister Shinzo Abe may delay a planned tax increase next year, as he organizes a series of meetings with noted economists who advocate fiscal spending.

Sterling fell to a two-week low of $1.4085, retreating from Friday's one-month high of $1.4437, after a poll showed Britain might vote to leave the European Union in a June referendum.

A better-than-expected wages report had little impact, with investors awaiting the UK budget from Chancellor George Osborne around mid-day. He is widely expected to announce further public spending cuts as the economy slows [GBP/].

Morgan Stanley analysts said in a note that aggressive fiscal tightening could hit sterling.

"It would impose more pro-cyclical fiscal constraints, weakening the already sluggish economy further, and it would darken the referendum outlook," they said.

(Additional reporting by Hideyuki Sano; Editing by Larry King)

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