* Dollar index near 4-month low before Fed policy decision
* Fed expected to continue tapering its bond-buying stimulus
* Focus on possible tweak to wording of forward guidance (Updates levels, adds comments)
By Hideyuki Sano
TOKYO, March 19 (Reuters) - The dollar stood near its lowest level in more than four months against a basket of currencies on Wednesday, on some trepidation ahead of Janet Yellen’s inaugural policy review as the Federal Reserve’s chief.
The dollar, however, climbed against the Chinese yuan, which fell past 6.20 per dollar for the first time since April 2013.
The yuan has fallen this year as the People’s Bank of China engineered the weakness via state banks to stamp out speculative money betting on one-way yuan appreciation.
The dollar index stood at 79.439, not far from a 4-1/2-month low of 79.268 touched last Thursday. In the past two years, there has been strong support for the index around 78.60-79.00.
The Fed is widely expected to continue to reduce the size of its monthly bond purchase programme by $10 billion at the end of its two-day meeting later in the day, the first policy review since Yellen took the helm at the world’s most powerful central bank.
Traders are keenly focused on the Fed’s forward guidance on policy, with many expecting the Fed to reassure markets that interest rate hikes are still a long way off despite the unemployment rate easing faster than expected.
The Fed previously said that it would not raise interest rates until joblessness fell to at least 6.5 percent, a pledge that policymakers thought would hold until at least mid-2015. But that rate hit a five-year low of 6.6 percent in January, before rising to 6.7 percent in February.
Expectations that Yellen will pursue a broadly dovish stance have helped rein in U.S. Treasury yields, which in turn undermined the attraction of the dollar for bond investors.
“Many investors had probably expected the dollar to strengthen this year because the U.S. economy looked in better shape than others,” said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
“But their positioning has probably been damaged by the Ukraine crisis and poor economic data due to bad weather, and that’s probably a reason for the dollar’s struggles recently,” he added.
The yen held onto much of its recent gains. The dollar edged up 0.1 percent to about 101.58 yen, still not very far from a one-month low of 101.20 yen hit on March 3.
A trader for a European bank in Tokyo said dollar bids and offers were mixed on the downside, adding that there were some stop-loss dollar offers around 101.00 yen.
The yen showed little reaction to data showing that Japan logged a larger-than-expected trade deficit in February.
Tensions in Ukraine remain a focal point, although investor anxiety has eased somewhat after Russian President Vladimir Putin said on Tuesday that he did not plan to seize other regions of Ukraine, a day after Crimean citizens voted to be annexed by Moscow.
The euro fetched about $1.3921, down 0.1 percent on the day but not far from a peak of $1.3967 hit on Thursday, its highest level in 2-1/2 years.
Although the single currency was pitched by many banks at the start of 2014 as one of this year’s likely losers, it has drawn strength from a recovery in the euro zone, the currency bloc’s strong current account balance and an absence of fresh easing steps from the European Central Bank.
The single currency has also quickly pared its losses triggered on Tuesday by a sharp drop in Germany’s ZEW survey of investor and analyst sentiment, which was due largely to the Ukraine crisis.
The Australian dollar briefly touched a three-month high of $0.9138, supported by a return of risk appetite. It later pared gains and was last down 0.1 percent at $0.9119. (Additional reporting by Masayuki Kitano in Singapore; Editing by Chris Gallagher)