Dollar slips as markets await Fed rate outlook

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar edged lower on Wednesday, as investors awaited a widely-expected interest rate increase from the Federal Reserve, but grew cautious about the rate outlook this year given lingering uncertainty with the Trump administration's fiscal policy.

Fed fund futures have factored in a 94 percent chance of a rate rise on Wednesday. The focus has now shifted to whether the Fed is set for regular quarterly rate increases.

"There may be disappointment that the 'dot plots' are not going to rise much higher and therefore the language from the Fed may be more dovish than what they let on last week," said Jeremy Cook, head of currency strategy at FX payments company World First in London.

"There is still so much uncertainty toward fiscal policy in the United States," he added.

The so-called "dot plot" refers to the Fed's interest rate projections. Currently, the Fed's "dot plot" calls for three hikes this year.

In late morning trading, the dollar index slipped 0.1 percent to 101.57 (DXY)

Cook said the market needs to see four members of the Federal Open Market Committee shift their outlook higher to get a significant change in the 2017 median "dot plots."

Against the yen, the dollar was flat at 114.74 , well below last week's 115.51 peak, its highest since Jan. 19, as expectations built for the rate increase.

The dollar drifted higher earlier after data showed a steady increase in inflation, with the consumer price index posting its biggest year-on-year gain in February in nearly five years.

In the 12 months through February, the CPI accelerated 2.7 percent, the largest year-on-year growth since March 2012.

The Bank of Japan also began a two-day policy meeting on Wednesday. It is expected to hold its policy steady and stress that inflation is nowhere near levels that justify talk of withdrawing its massive stimulus.

Sterling gained to a week's high of $1.2258, rebounding from the previous day's eight-week low hit on worries of a painful and prolonged Brexit. The pound was last up 0.4 percent at $1.2202, although it dipped earlier below $1.22 after UK data showed wage growth slowed in the three months to January.

The euro, meanwhile, rose 0.3 percent to $1.0629 , as concern about Wednesday's Dutch parliamentary election was offset by market speculation the European Central Bank may be ready to wind down its stimulus program.

The Dutch vote, taking place amid a diplomatic row between the Netherlands and Turkey, is being closely watched as a test of populist and anti-immigrant sentiment in Europe, before national elections in France next month and in Germany in September.