FOREX-Dollar steadies as market looks to Fed meeting

* Dollar mostly treads water ahead of Fed meeting

* Inflation comments from ECB officials nudge euro higher

* Markets expect Fed focus on inflation, no rate hike (Updates prices, adds comments, Norwegian interest-rate hike)

By Steven C. Johnson

NEW YORK, June 25 (Reuters) - The dollar held steady against the euro on Wednesday and rose against the yen hours before the end of a Federal Reserve meeting that markets hoped would offer clues about future U.S. interest-rate moves.

The euro briefly edged above $1.56 EUR= after European Central Bank President Jean-Claude Trichet said inflation risks have risen and reiterated that policy-makers may lift euro-zone interest rates next month. See [ID:nL25301341]

It had retreated by late morning, though, as investors squared positions before the end of the Fed meeting. Markets expect the U.S. central bank to hold the benchmark fed funds rate at 2 percent but are eager to see whether officials echo their ECB counterparts by focusing more closely on inflation rather than growth risks.

"The Fed is going to try to talk down inflation and inflation expectations as much as it can, but the market does not believe a move is imminent," said Firas Askari, head of foreign-exchange trading at BMO Capital Markets in Toronto.

With U.S. short-term interest-rate futures already pricing in a half-percentage point of rate hikes by year end, "anything short of an immediate hike or explicit signal of an imminent one" should lead to a weaker dollar, said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

"We think those looking for an aggressive tightening bias will be disappointed," he added.

Late morning, the euro was changing hands at $1.5568, up just a tad from late Monday and below a session peak of $1.5615. The dollar was up 0.4 percent at 108.29 yen JPY=, while sterling was off 0.2 percent at $1.9666 GBP=.

Against a basket of six major currencies, the dollar was up just 0.1 percent at 73.324 .DXY.

Absent any surprises from the Fed, analysts said they expect the euro to move toward the upper end of a broad $1.53-$1.58 range that has persisted for the past month.

"Foreign-exchange markets continue to be sensitive to inflation more than any other story," said Simon Derrick, head of currency research at Bank of New York Mellon in London.

"Investors will continue to favor currencies where the central banks have both the ability and willingness to hike rates if necessary."

Surging energy and food prices have forced other central banks in the developed and developing world to raise rates in recent months, and the ECB has signaled that it's likely to follow suit in July with a quarter-point move to 4.25 percent.

Norway's central bank raised rates by a quarter-percentage point on Wednesday to 5.75 percent and signaled the possibility of more to come. That pushed the dollar down 0.2 percent to 5.1050 Norwegian crowns NOK=.

For the Fed, the policy decisions are less clear cut. U.S. housing prices continues to decline -- a report on Wednesday showed new home sales in May fell by 2.5 percent -- while consumer confidence has plunged to 16-year lows.

Separate data on Wednesday showing orders for U.S. durable goods were unchanged in May had little impact on currencies.

Strategists at Brown Brothers Harriman said that for now, the Fed will attempt to sound more hawkish on inflation without painting itself into a corner, "as, arguably, the ECB has done." (Additional reporting by Ian Chua in London; Editing by Chizu Nomiyama)