* Dollar rises against yen and euro
* Fed expected to continue tapering its bond-buying stimulus
* Canadian dollar drops as sterling recovers vs US dollar (Adds quotes, updates prices; changes byline and dateline, previous LONDON)
By Michael Connor
NEW YORK, March 19 (Reuters) - The dollar got a lift on Wednesday from expectations the Federal Reserve will look beyond the drag of a harsh winter on America’s economy and keep unwinding its monetary stimulus.
The greenback’s gains against the euro and yen were held back by some trepidation before Janet Yellen’s inaugural policy review as Federal Reserve chief, traders said.
The Fed is widely expected to reduce its monthly bond-purchase program by a further $10 billion at the end of its two-day meeting. Yellen, widely regarded as a dove, is due to address a news conference later in the day.
Many in markets expect the Fed to amend its forward guidance on policy, assuring investors that interest rate hikes remain distant despite unemployment easing faster than expected.
“For the Fed to light a fire under the dollar it would tend to take a less dovishly worded statement or any hint from the Fed that short-term rates could rise sooner than current forecasts of around mid-next year,” Western Union Business Solutions senior market analyst Joe Manimbo said in a note.
The dollar edged up 0.13 percent to 101.55 yen, staying above a one-month low of 101.20 yen hit on March 3. The euro fetched $1.3916, down 0.14 percent on the day but not far from last Thursday’s 2-1/2-year high of $1.3967.
The dollar index was up at 79.49, a gain of 0.09 percent.
“The key thing will be whether there will be any change in the timing of rate hikes by the Fed from next year,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.
“I am not convinced the Fed is ready to materially change guidance and we will see a very even-handed Yellen. All of which leaves investors looking to second-quarter U.S. data before taking fresh positions in the dollar.”
The Fed has said it will not raise rates until joblessness falls to at least 6.5 percent, a pledge policymakers thought would hold until at least mid-2015. But it hit a five-year low of 6.6 percent in January, before rising to 6.7 percent in February.
Expectations Yellen will pursue a broadly dovish stance have helped rein in U.S. Treasury yields and this, in turn, has undermined the attraction of the dollar for investors.
The U.S. dollar, though, hit its highest since late January against the Canadian dollar at C$1.1196. Selling in the currency gathered pace after Bank of Canada Governor Stephen Poloz said on Tuesday Canada could face a prolonged period of sluggish growth and lower interest rates.
Sterling rose as high as $1.6653, rebounding from a one-month low struck on Tuesday with help from data showing wages ticking higher and a steadily improving jobs market. It stood at %1.6611 in midmorning New York trade.
The number of Britons claiming jobless benefits fell more than expected while wages rose 1.4 percent year-on-year, which though higher than forecast was still below inflation.
Finance minister George Osborne, due to present the UK annual budget later on Wednesday, is expected to stick to his plan to fix public finances. This will keep the onus on the Bank of England to keep monetary policy loose to ensure growth.
“In order to keep the pressure on the budget deficit, a continuation of austerity can be expected from the government,” said Jane Foley, senior currency strategist at Rabobank.
“However, with the election a little over a year away, some crowd pleasers are also likely and this could lend the pound some support.”
And while the safe-haven yen lost ground, investors remained cautious over tensions in Ukraine. Anxiety eased somewhat after Russian President Vladimir Putin said on Tuesday he did not plan to seize other regions of Ukraine, after Crimean citizens on Sunday voted to be annexed by Moscow. (Additional reporting by Anirban Nag in London; Editing by Chris Reese)