* Global stocks hit 12-month peak before paring gains
* Dollar steadies after touching 1-year low; kiwi jumps
* Crude falls towards $71, Europe CDS rally gathers pace
By Atul Prakash
LONDON, Sept 23 (Reuters) - World stocks hit their highest in nearly 12 months on Wednesday and the dollar touched a one-year low before steadying, but investors remained cautious ahead of the Federal Reserve's policy decision later in the day.
Crude oil fell towards $71 a barrel, pressured by doubts over U.S. demand after industry data showed a surprise build in crude stockpiles.
The MSCI world equity index was up 0.2 percent at 291.69 points after rising to 292.08, its highest since early October last year. The FTSEurofirst index of top European shares rose 0.4 percent on the back of stronger financial stocks.
The MSCI index has risen 28 percent so far this year.
Investors awaited a decision by the Fed, which is widely expected to hold overnight lending rates at close to zero percent. The Fed is likely to repeat its intention to keep rates exceptionally low for an extended period in a statement at around 1815 GMT, after the U.S. central bank's two-day policy meeting draws to a close.
"We think the Fed is unlikely to communicate any near-term reversal of its exceptionally accommodative monetary policy," said Geoffrey Kendrick, currency analyst at UBS.
The Fed is also expected to take note of an improving economy, while cautioning that high unemployment puts the recovery at risk. It is also seen keeping its massive financial support for the economy in place.
European stocks got support from surveys showing euro zone services business grew for the first time in 16 months in September and factory output rose for the second month running, suggesting the bloc has pulled out of recession..
Sentiment also improved after U.S. Treasury Secretary Timothy Geithner said on Tuesday that the world's biggest economy was at the "beginnings" of a recovery, and the key was to ensure that the recovery was self-sustaining.
A U.S. plan to build a more balanced global economy won support from leaders of some of the largest Western powers on Tuesday, who warned against returning to business as usual once recovery takes hold.
But some investors wanted to see more positive news.
"The markets are treading water, with neither the bulls or the bears taking the lead. It feels as if it is easier for investors to adopt a wait-and-watch approach until there is a definite move either to the upside or the downside," said John Murphy, analyst at ODL Securities.
DOLLAR STEADY AFTER 1-YR LOWS
The dollar steadied after falling to its weakest for a year against a currency basket and the euro pulled back from a one-year high struck against the dollar.
The New Zealand dollar surged to its highest in 13 months against the U.S. currency after the economy unexpectedly pulled out of recession in the second quarter, fuelling expectations the central bank might have to start raising rates sooner than previously thought.
"Overall the FOMC and the G20 are unlikely to disrupt the recent positive tone in asset markets and that's likely to see the trends in currency markets resume," said Ian Stannard, currency strategist at BNP Paribas in London.
"I will be looking at the currency pullback I expect today to be very much providing a buying opportunity for the pro-cyclical and commodity currencies," he said.
Most euro zone government bond yields edged higher as the market absorbed 5.6 billion euros ($8.28 billion) of new five-year German debt which analysts said drew reasonable demand.
A rally in European credit default swap spreads maintained momentum and the flow of new bond issues accelerated in the cash market, illustrating the scale of investors' appetite for credit.
"Many investors may have missed the rally in credits and started to invest in credits only lately, now driving the market further towards tight credit spreads," strategists at UniCredit said in a note to investors. (Additional reporting by Tamawa Desai, Emelia Sithole and Jane Merriman in London; Editing by Victoria Main)