* Dollar index not far from 2 1/2-month high hit on Friday
* US durable goods, consumer confidence below market expectations
* Sterling steadies after marking 2-week low after soft UK GDP
* Aussie skids over 1 pct to 3-week low on soft inflation data
By Lisa Twaronite and Hideyuki Sano
TOKYO, Oct 28 (Reuters) - The dollar edged closer to a 2-1/2-month high against a basket of currencies on Wednesday as traders awaited clues from the Federal Reserve about the timing of a U.S. interest rate increase.
A rate hike at the Fed’s two-day policy meeting which ends later on Wednesday is virtually priced out due to underlying concerns over a slowdown in China and the broader impact on global growth.
But many investors still expect the Fed to indicate that interest rates could rise as early as December.
Ahead of the Fed outcome, the dollar index has moved in a narrow range this week.
The index, which gauges the greenback against six rival currencies, stood at 96.958 , up about 0.1 percent from late U.S. trade and not far from a 2 1/2-month peak of 97.201 scaled on Friday.
“Heading in to the FOMC, it’s fair to say that market consensus is that there will be no change, but if there’s any risk, it would be toward a hike, so therefore, intuitively, if you needed to put your cash somewhere, your safest bet would be the dollar today,” said Bart Wakabayashi, head of foreign exchange for State Street Global Markets in Tokyo.
“Tomorrow, we could be looking at all different big figures in all different currencies,” he said. “But even though the U.S. numbers last night were quite bad, the dollar was still able to maintain support.”
Tuesday’s U.S. economic data did not back the case for a rate hike, with both durable goods orders and consumer sentiment falling short of market expectations.
“Recently, we had a run of soft U.S. data, retail sales, industrial output, trade and now durable goods. None of these really support a rate hike,” said Masatoshi Omata, senior client manager of market trading at Resona Bank.
Non-defense U.S. capital goods orders excluding aircraft, a closely watched proxy for business spending plans, slipped 0.3 percent last month, against median forecast of a flat reading, with August figure also downwardly revised to a 1.6 percent decline.
Separately, the Conference Board’s consumer sentiment index fell to 97.6 this month from a reading of 102.6 in September, despite median forecast of a small rise to 103.0.
The euro, which was knocked by European Central Bank chief Mario Draghi’s surprisingly dovish stance last week that opened the door to further monetary easing in December, fell about 0.1 percent to $1.1034. But the single currency stayed above Monday’s 2-1/2-month low of $1.0989.
ECB Executive Board member Benoit Coeure said late on Tuesday in Mexico that the bank may need to cut its deposit rate further if inflation rises towards its target more slowly than previous expected.
“The German two-year yields are already trading at around minus 0.3 percent. You could say that a 0.1 percentage point cut in deposit facility rate to minus 0.3 percent is already priced in,” said Masafumi Yamamoto, chief currency strategist at Monex Securities.
The yen stood at 120.41 to the dollar, having risen to this week’s high of 120.16 on Tuesday after the below-expected U.S. durable goods orders data.
The Bank of Japan’s policy meeting on Friday also looms large for the yen, with traders split on whether Japan’s central bank will expand its stimulus.
The BOJ is set to cut its price forecasts in a semi-annual report which is also due on Friday, but even in light of this, many BOJ officials would prefer to hold off on expanding the bank’s massive stimulus programme.
The Australian dollar tumbled more than 1 percent to a three-week low of $0.7109, after surprisingly soft Australia’s inflation data bolstered expectations of a rate cut by the central bank next week. It last stood at $0.7120, down nearly 1 percent.
The British pound steadied after it slipped to a two-week low on Tuesday after data showed Britain’s economy slowed more than expected in the third quarter, fuelling concern that a period of rapid expansion is coming to an end.
Gross domestic product growth slackened to 0.5 percent in the three months to September from 0.7 percent in the previous quarter. Economists had forecast a drop to 0.6 percent.
Sterling fell to $1.5283 on Tuesday, having slipped 1.5 percent from one-month high of $1.5510 touched last Thursday. It last stood at $1.5302. (Editing by Shri Navaratnam & Kim Coghill)