Forex - U.S. dollar slightly higher late morning in Sydney ahead of Fed decision

The U.S. dollar traded in a narrow range against the euro and the yen in afternoon trade in Asia on Wednesday, with investors preferring to stay on the sidelines ahead of the Federal Open Market Committee (FOMC) meeting.

The FOMC will announce the outcome of its two-day meet later today and investors are anxious to see if the Federal Reserve policymakers will signal the end of the interest rate cutting cycle in the United States. The Fed is widely anticipated to lower its key rates by a quarter of a percentage point to 2 percent, the smallest cut this year.

Before the FOMC's statement, which will likely give investors a clue on where rates are headed, the U.S. will release first-quarter economic data which may influence the outcome of the Fed's meeting during the day.

"We have a Fed decision tonight and it's unlikely that investors will be adding to their risks prior to the announcement," said David Mann, a currency strategist at Standard Chartered Bank.

He said the release of the economic data "will be very important for the dollar and Fed rate expectations".

At 1:00 p.m. (0500 GMT), the dollar was trading at 103.97 yen from 104.08 yen in Sydney this morning. The euro was quoted at $1.5582 from $1.5569.

While most analysts and economists expect the Fed to hold interest rates for a while after tonight's expected rate cut to ease inflationary pressures, there are others who remain skeptical.

"I don't think at this moment investors should be bullish about the U.S. economy," said Mark Wan, chief analyst at Hang Seng Investment Services Ltd. "And I don't think the FOMC will hold off rate cuts in the foreseeable future."

Standard Chartered's Mann agrees.

"It is unlikely that the Fed will signal that it's the end of the easing cycle. That would tie their hands and limit their policy action onwards," said Mann.

The Fed will likely cut rates by 25 basis points more in June and another quarter point in August, he said.

Bank of America's Tomoko Fujii shared Mann's views that the Fed may slash its key rates by another 50 basis points, a quarter point each in June and August.

"All this talk about U.S. rates bottoming out are premature," said Fujii in an earlier interview. "It is too early to judge that the Fed easing cycle is ending -- we maintain our view that there will be two more rate cuts after this week."

Since the Fed began cutting rates in September, it has lowered its rates by a cumulative 300 basis points in an effort to ease the credit crisis that stemmed from unpaid housing loans extended to borrowers with junk or no credit ratings.

"The FOMC may well use this meeting to signal that an end to the easing cycle is nearing, given the substantial easing in policy over the past six months," said Spiros Papadopoulos, head of currency strategy at NAB Capital Markets.

Currency traders are betting on an 80 percent chance that the Fed will lower rates by a quarter point and expect that it would be the last rate cut, said Papadopoulos.

Meanwhile, the Bank of Japan earlier today voted to keep its key rate unchanged at 0.5 percent, the lowest among developed countries.

Hong Kong 1:00 p.m. (0500 GMT)

U.S. dollar

yen 103.97

Swiss franc 1.0364

Euro

U.S. dollar 1.5582

yen 161.92

Swiss franc 1.6150

pound 0.7917

Pound

U.S. dollar 1.9680

yen 204.54

Swiss franc 2.0391

Australian dollar

U.S. dollar 0.9345

pound 0.4748

yen 97.10