May 2, 2018 / 11:30 AM / 18 days ago

FOREX-Dollar consolidates gains after break above key level; Fed eyed

* Dollar slips slightly but holds near 3-1/2 month high

* Euro hovers around $1.20 mark

* All eyes on Fed meeting decision later on Wednesday

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee and Tommy Wilkes

LONDON, May 2 (Reuters) - The dollar consolidated gains on Wednesday after hitting a 3-1/2 month high in the previous session as investors waited for the outcome of a U.S. Federal Reserve policy meeting at which policymakers may outline the future path for interest rates.

Although financial markets don’t expect any change in U.S. monetary policy, investors will look for any comments that take into account the impact of a stronger dollar and higher yields on monetary policy. Any evidence of increased caution is likely to stop the dollar’s rally in its tracks.

“The dollar is charging hard into tonight’s FOMC meeting where the bar is now much higher for the Fed to surprise on the hawkish side,” said John Hardy, head of FX strategy at Saxo Bank.

Against a basket of its rivals, the dollar surged past its 200-day moving average on Tuesday, a level it hasn’t traded above since May 2017, and a level which typically attracts some reassessment from large institutional investors on their dollar positions, according to Morgan Stanley.

On Wednesday, it was trading flat at 92.39 after hitting a Jan. 10 high of 92.57 in the previous session.

“Despite the moves we have seen in the dollar in recent days, financial conditions haven’t really tightened noticeably but that may change if the rally continues,” said Manuel Oliveri, an FX strategist at Credit Agricole. .

RATE HIKES

While the Federal Reserve is widely expected to keep the benchmark interest rate on hold at its policy meeting ending on Wednesday, it looks certain to raise borrowing costs next month, given signs of possible acceleration in the U.S. economy, and possibly two more times over the remainder of the year.

The Institute for Supply Management (ISM) survey published on Tuesday showed U.S. factory activity slowed in April, but it highlighted shortages of skilled workers and rising costs, suggesting inflationary pressure is building.

Market expectations are for nearly three more rate hikes until January 2019.

Elsewhere, the euro received some reprieve after posting its biggest weekly loss in more than two months last week after data showed the euro zone’s economy slowing as expected in the first quarter of 2018.

Economists said temporary factors were partly behind the weakness and that the economy should continue to expand strongly this year, although some signs that the rebound in the region’s economy has peaked have weighed on the euro.

The euro rose 0.1 percent to $1.20, up from the lows of $1.1981 hit earlier this week.

Sterling trod water after falling through the $1.36 line in the previous session as investors further reduced bets of a central bank rate hike next week.

The British pound edged 0.3 percent higher at $1.3656 as a construction survey came in stronger than expected. Sterling fell to a four-month low of $1.3588 on Tuesday.

Other currencies which have borne the brunt of the dollar’s rally in the last two weeks such as the Australian dollar, Canadian dollar and the Swiss franc stabilised on Wednesday, rising around 0.2 percent. (Reporting by Saikat Chatterjee and Tommy Wilkes; Editing by Gareth Jones)

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