* Euro trades slightly below two-year high against dollar
* Dollar index drifts off two-year low touched Friday
By Lisa Twaronite
TOKYO, Oct 28 (Reuters) - The dollar licked its wounds inearly Asian trading on Monday, steadying against majorcounterparts ahead of the U.S. Federal Reserve's policy-settingmeeting following a testing week which saw it tumble to two-yearlows against the euro.
Economists and market participants widely expect FederalOpen Market Committee members to hold steady on purchasing $85billion of assets next month when they meet on Tuesday andWednesday. Most expect the central bank to delay tapering itsstimulus to at least March next year.
Investors will also keep a wary eye on Chinese short-termrates, after they surged last week to their highest level sincethe June credit crunch.
"For the coming week, the market will continue to focus onthe development in China's money market and the outcome of theU.S. economic data/FOMC rate decision," strategists at Barclayssaid in a note to clients.
"While the consensus forecast now looks for March 2014tapering, their policy decision is ultimately data-dependent andincoming U.S. data are worthy of close attention," they added.
The euro was nearly flat at $1.3805, after rising ashigh as $1.3832 on Friday, its highest since November 2011,according to Reuters data.
The euro remained buoyant despite downbeat German Ifobusiness sentiment data on Friday, which unexpectedly showed adecline for the first time in six months.
Currency speculators reduced their dollar bets to the lowestlevel since February in the week ended Oct. 1, according to datafrom the Commodity Futures Trading Commission released onFriday.
Against a basket of currencies, the dollar was slightlyhigher at 79.216, but still not far from a nearnine-month low of 78.998 touched on Friday.
The dollar added about 0.2 percent against the yen to 97.55yen, edging away from a more than two-week low of 96.92yen hit on Friday.
The dollar remained supported against the yen on the viewthat the yield differential between Japanese government bondsand U.S. Treasuries will persist, as the Fed eventually movestoward tapering its stimulus while the Bank of Japan maintainsits ultra-easy stance.
The BOJ is widely expected to maintain its monetary policystimulus at its meeting on Wednesday and Thursday, to meet itstarget of two percent inflation in two years.
The BOJ will also release its latest long-term economicforecasts on Thursday. Sources close to the central bank havetold Reuters that it is expected to revise up economic growthfor the fiscal year beginning in April 2014 to around 1.5percent from the current 1.3 percent.
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