* Dollar index hovers near four-week trough
* Kiwi outperforms, hits four-month highs vs USD
* Fed likely to reduce stimulus modestly, sound dovish
By Ian Chua
SYDNEY, Sept 18 (Reuters) - The U.S. dollar held near a four-week trough against a basket of major currencies in early Asian trade on Wednesday as investors bet that any move by the U.S. Federal Reserve to roll back stimulus will be very modest.
The Fed's highly anticipated rate review ends later in the day and markets expect the central bank will probably announce a small reduction to its $85 billion monthly bond-buying programme.
Indeed, since the disappointing U.S. nonfarm payrolls report on Sept. 6, markets have scaled back expectations on the size of any pullback in stimulus.
That kept the dollar pinned near a four-week trough against a basket of major currencies. On the yen, the greenback bought 99.19, not far off Monday's two-week low of 98.45.
The euro stood at $1.3357, near a 2-1/2 week peak of $1.3385 reached on Monday. The common currency was further underpinned overnight by a closely watched report that showed German analyst and investor sentiment jumped more than expected this month.
But the standout performer among the major currencies was the New Zealand dollar, which hit a four-month high of $0.8249 . It last traded at $0.8233.
The move came as New Zealand's Fonterra Co-operative Group, the world's biggest dairy exporter, reported higher milk prices at its second auction this month.
Overall, traders said there was little conviction in the market as investors were unwilling to take fresh positions ahead of the outcome of the Fed's policy review due at 1800 GMT. Chairman Ben Bernanke will give a news conference after that.
Market consensus is for a cut of $10 billion to the bond-buying stimulus, twinned with a pledge to keep interest rates near zero at least until the jobless rate falls below 6.5 percent. Some analysts reckon the Fed may lower the threshold to 6.0 percent.
Traders said any delay to the tapering may be seen as dovish by markets and could prompt investors to sell the dollar. Conversely a bigger reduction of stimulus could be seen as hawkish, lifting demand for the greenback.
BNP Paribas strategists said their base case scenario is for the Fed to pass on announcing tapering, but leave the door open for reducing stimulus later in the year.
"If they do elect to announce a tapering of purchases, we expect the pace to be a gentle $10 billion with reduced emphasis on a mid-2014 end point noted at the June press conference," they wrote in a note.
There is no major economic news out of Asia on Wednesday, leaving the focus squarely on the Fed's decision and Bernanke's news conference.