Global shares slip, dollar rises as caution reigns before Fed

By Jamie McGeever

LONDON (Reuters) - Shares fell and the dollar rose on Wednesday as markets awaited the outcome of the U.S. Federal Reserve's policy meeting, which is expected to leave interest rates on hold but keep the door open for further increases later this year.

Investors have welcomed the easing of the intense volatility that swept through financial markets in the first two months of the year. But they are aware the calm means the Fed might be more inclined to resume tightening soon.

That supported the dollar, which gained the most ground against the yen after Bank of Japan governor Haruhiko Kuroda said the central bank had room to slash interest rates to around -0.5 percent from -0.1 percent at present .

European shares had tried to buck the trend in Asia, rising along with oil prices early in the session but then slipping into the red while oil held its gains.

In Britain, investors were watching finance minister George Osborne's budget presentation, which is expected to cut public spending and warn the domestic economy will not escape global economic turbulence unscathed.

"We're seeing some caution in the markets ahead of the Fed decision as investors look to the central bank for clues on the pace of interest rate hikes in the U.S.," said Craig Erlam, senior market analyst at Oanda.

Around midday in Europe, the FTSEuroFirst 300 index of leading shares was down 0.2 percent at 1,338 points.

Germany's DAX was up 0.3 percent, France's CAC 40 was down 0.1 percent and Britain's FTSE 100 gained 0.1 percent.

Oil prices bounced after OPEC sources said oil producers, including Gulf OPEC members, support holding talks next month on freezing output even if Iran won't take part.

U.S. crude gained 2 percent to $37.09 a barrel, while Brent rose 1.9 percent to $39.48, lifting resources stocks. Shares in BP were up nearly 2 percent.

In Asian trading, MSCI's broadest index of Asia-Pacific shares outside Japan edged down 0.1 percent. Japan's Nikkei suffered from an initial rise in the yen and fell 0.8 percent.

MSCI's global share index was last down 0.2 percent. U.S. futures pointed to dip of 0.1 percent at the open.

LOSING THE (DOT) PLOT

While no rate move is expected, the Fed's meeting will include updated economic projections and a news conference with Chair Janet Yellen, events that have caused violent market reactions in the past.

Hurting sentiment on Tuesday were downward revisions to retail sales that left consumer spending looking softer. One result was a drop in the Atlanta Fed GDPNow measure of economic growth to 1.9 percent for the first quarter from 2.2 percent.

On the other hand, financial market volatility has subsided in recent weeks. The Fed had pointed to this uncertainty as one reason behind its decision in January not to follow December's rate increase with another.

This highlights the balancing act the Federal Open Market Committee must perform at its meeting.

Analysts generally assume Fed projections for interest rates - the "dot plot" - will indicate only three increases are likely this year, not four. Yet the market is pricing in just one move of 25 basis points for 2016.

"We do not expect that the Fed will raise rates today. Instead, we may see a consensus forming for a next rate hike in June," analysts at Rabobank said in a note on Wednesday.

"Meanwhile the FOMC's dot plot still includes an expectation of four rate increases this year, which seems excessive. We may therefore see the FOMC bring down the number of rate hikes predicted in the dot plot to three."

The dollar was up a fifth of 1 percent against a basket of currencies and reversed an earlier slip against the yen to trade 0.4 percent higher at 113.65 yen. The euro slipped 0.2 percent back below $1.11.

Sterling was down a third of a percent against the dollar at $1.4100 before the budget, where Osborne has tried to get his austerity drive, and his own political ambitions, on track without upsetting voters before June's European Union referendum.

U.S. Treasury bond yields were mostly flat (US2YT=RR> and benchmark euro zone sovereign bond yields were down up to 3 basis points.

(Reporting by Jamie McGeever; Editing by Larry King)