FOREX-Dollar firms slightly as market braces for Fed

* Fed expected to launch 'Operation Twist'; could lift dlr

* Europe's woes feed anxiety; Barclays adjusts forecasts

* Dollar/yen nears record low; market wary of intervention (Updates prices, adds comment, detail)

By Steven C. Johnson

NEW YORK, Sept 21 (Reuters) - The dollar firmed against most major currencies on Wednesday as markets awaited the end of a Federal Reserve meeting to see what officials would do to boost U.S. growth.

The yen, however, neared a record high against the U.S. currency as worries about the world economy and the approaching end of Japan's fiscal half-year boosted demand.

The dollar fell to 76.11 yen JPY=EBS, near a 75.94 record low, but clawed back to 76.35 yen during New York trade.

The euro pared earlier losses to trade up 0.1 percent at $1.3708 EUR=, while sterling hit an eight-month low beneath $1.56 GBP=D4 after minutes released by the Bank of England showed it was ready to pump more money into the UK economy. [ID:nAHLKKE73L]

The dollar rose 1 percent to 0.8951 Swiss francs CHF= and 0.7 percent to 0.9984 Canadian dollars CAD=.

Traders said the choppy trade reflected position-squaring ahead of the Fed's policy announcement, due at about 2:15 p.m. (1815 GMT).

Markets expect the U.S. central bank to tilt its $2.8 trillion portfolio toward longer-dated government debt, an attempt to stoke lending with lower long-term borrowing costs.

Dubbed "Operation Twist," the move would likely see the Fed sell short-dated securities, which could nudge up short-term rates and boost the dollar a bit. It would not increase the money supply, which traders say should support the dollar. For more, see [ID:nS1E78J25W]

"The dollar is consolidating ahead of the Fed outcome," said Marcus Hettinger, global FX strategist at Credit Suisse. "If they opt for Operation Twist and decide to buy short-dated Treasuries we could see yields at the near end rise and provide a lift to the dollar. But those gains are unlikely to last."

But if the Fed succeeds in pushing long-term rates lower, Japanese investors could opt to sell Treasuries and repatriate the proceeds, adding to upward pressure on the yen. That could boost repatriation flows ahead of Japan's fiscal half-year end when investors typically sell foreign fixed-income assets.

The U.S. benchmark 10-year yield US10YT=RR was near a multi-decade low at 1.92 percent Wednesday, compared with 1.01 percent on 10-year Japanese government bonds. JP10YTN=RR

If the Fed's policy announcement has an impact on the dollar, "it would be sequential: first, by working to tame raging market risk aversion; second, by keeping or pushing rates low across the yield curve. Both are dollar-negative," said Dan Dorrow, head of research at Faros Trading in Stamford, Connecticut.

FED LIMITS, EUROPE'S WOES

Firas Askari, head of currency trading at BMO Capital Markets, said the Fed is "reaching far down into an almost empty toolbox" and said markets remain worried about Europe's debt crisis.

European shares fell, and Barclays Capital slashed its euro forecasts, putting the currency at $1.33 in a month's time and $1.25 in three months' time. It cited fear Greece will default and increasing pressure on Italy and Spain.

The euro and the dollar both rose against the Swiss franc as talk swirled that the Swiss National Bank may lift its euro/Swiss target to 1.25 from 1.20. The SNB declined comment.

The euro rose 0.8 percent to 1.2261 francs EURCHF=R.

Askari said further Swiss attempts to weaken the franc would increase pressure on Japanese authorities to intervene should the dollar fall into the 75-75.50 yen range.

A strong currency hurts exports in Japan and Switzerland and slows overall economic growth.

In the options market, one-month dollar/yen implied volatility inched higher JPY1MO= and risk reversals moved out in favor of yen buying. (Additional reporting by Anirban Nag in London; Editing by Leslie Adler)