By Richard Hubbard
LONDON (Reuters) - A rally in world equities and gold paused on Tuesday while the dollar inched up as investors positioned for widely expected confirmation from the U.S. Federal Reserve that it is sticking with its monetary stimulus.
Although markets are wary of potential surprises when the Fed presents the outcome of a two-day meeting on Wednesday, a rally in riskier assets over the past week and a dollar selloff is seen as having largely factored in an unchanged policy.
The pan-European FTSEurofirst 300 index hit a 5-year high last week as investors welcomed the expected delay in Fed tapering. The index edged down 0.1 percent on Tuesday as attention turned to what has so far been a mixed earnings season in Europe.
Markets expect the Fed to extend its $85 billion monthly bond buying scheme into next year while it assesses the impact of this month's government shutdown on growth.
"People are more sanguine about the event risk from the Fed, and I think quite a few investors are comfortable with the fact that a Fed move could be delayed until March," Dennis Jose, European equity strategist at Barclays Capital, said.
The European share market dip followed a softer session in Asia where MSCI's broadest index of Asia-Pacific shares outside Japan lost about 0.3 percent and Japan's Nikkei stock average gave up 0.5 percent.
MSCI's world equity index, tracking shares in 45 countries, ended four days of gains to trade virtually.
Among third quarter earnings reported so far in Europe, 53 percent of companies on the pan-European STOXX 600 index have either beaten or met market forecasts while 47 percent have missed them.
That pattern continued on Tuesday, with German industrial gases maker Linde and French tyre firm Michelin cutting earnings targets.
Deutsche Bank posted a 98 percent drop in quarterly pre-tax profit.
"Across the board, results have been a mixed bag. It doesn't look too great," said Terry Torrison, managing director at Monaco-based McLaren Securities.
Currency, fixed income and commodity markets mostly moved in narrow ranges ahead of the Fed announcement.
The dollar had gained slightly against a basket of currencies as bets on a Fed tapering delay petered out and many players withdrew from the market.
"There is a lightening of positions before the Fed, but volumes are low - at least 20-30 percent lower than usual," said Alvin Tan, currency strategist at Societe Generale.
The euro, which has benefited from the dollar's recent decline and hit a two-year high of $1.3833 on Friday, was flat on the day at $1.3780.
Dealers said investors were wary of pushing the single currency any higher given concerns that the European Central Bank may express unease at the currency's strength.
German Bund futures were flat at 141.15, staying near a two-month high of 141.23 hit on Monday. Cash 10-year German yields were unchanged at 1.75 percent.
Gold, which has risen 8 percent since mid-October to close to a five-week high, shed about 0.5 percent to trade at around $1,345.50 as its rally ran out steam.
"We think the (Fed) expectations have already been priced in and gold is due for a correction," said Songwut Apirakkhit, managing director of Globlex Holding Management.
Brent crude edged down toward $109 a barrel, though it held onto most of the previous day's gains made when reports of a sharp drop in Libyan oil exports rekindled worries over supply.
Libya's crude oil exports have dropped to less than 10 percent of capacity due to the worst disruption in its oil industry since the 2011 civil war.
(Additional reporting by Sudip Kar-Gupta and Anirban Nag; Editing by John Stonestreet)