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Dollar dips, stocks edge higher as Fed meets

By Herbert Lash

NEW YORK (Reuters) - The dollar retreated and global equity markets were flat to modestly higher on Tuesday as Federal Reserve policymakers began a two-day meeting where they are expected to decide to begin to roll back the Fed's stimulus program.

Wall Street stocks rose, leading some other equity gauges to eke out gains, after data on U.S. consumer prices added to sentiment that Fed Chairman Ben Bernanke will lead the U.S. central bank to begin to modestly trim back its bond buying at the end of its meeting.

"The Fed is going to be very gradual in any tapering process, as the most aggressive estimates are $10 or $15 billion will come out" of the current monthly purchases, said Art Hogan, managing director at Lazard Capital Markets in New York.

The avoidance of a military strike against Syria and global economic data that continues to improve also underpinned stock gains, Hogan said.

U.S. consumer prices barely rose in August. However, gains in rents and medical care costs pointed to a stabilization in underlying inflation. A 1.8 percent rise over the past 12 months in core inflation, which strips out the volatile energy and food components, could ease concerns about a disinflationary trend and could allow the Fed to begin to scale back its $85 billion a month in bond purchases.

The Labor Department said its Consumer Price Index edged up 0.1 percent last month after rising 0.2 percent in July. Economists had expected consumer prices to rise 0.2 percent last month.

The euro rallied against the dollar after a better-than-expected reading of a German investor sentiment survey, while European shares edged lower, pressured by weakness in the auto sector following a decline in demand last month.

The euro was last up 0.19 percent at $1.3358. The dollar was down 0.19 percent versus a basket of six currencies at 81.143 and was last up 0.06 percent against the yen, at 99.11 yen.

MSCI's all-country world equity index rose 0.08 percent, lifted by gains in U.S. stocks.

The Dow Jones industrial average was up 34.95 points, or 0.23 percent, at 15,529.73. The Standard & Poor's 500 Index was up 7.16 points, or 0.42 percent, at 1,704.76. The Nasdaq Composite Index was up 27.85 points, or 0.75 percent, at 3,745.70.

Europe's FTSEurofirst 300 index of leading European shares fell 0.46 percent to close at 1,252.63.

Brent crude fell below $109 a barrel as a deal averting any imminent U.S. attack on Syria calmed fears of a disruption to Middle East oil supplies and after output resumed at a large oilfield in western Libya.

Brent crude for delivery in November fell $1.88 to settle at $108.19 a barrel. U.S. crude for October delivery settled down $1.17 at $105.42 a barrel.

U.S. Treasury debt prices rose as investors awaited the Fed's decision on stimulus and clues on how it might manage short-term interest rates.

A recent Reuters poll showed economists expect the Fed to reduce its asset purchases by a relatively modest $10 billion a month.

The Fed will release its policy statement at 2 p.m. (1800 GMT) on Wednesday, after the end of the meeting, followed by a news conference by Bernanke at 2:30 p.m.

Longer-dated U.S. Treasuries prices erased gains as higher Wall Street stock prices and weaker German Bunds reduced initial bids for U.S. government debt.

Benchmark 10-year Treasury notes were up 4/32 price to yield 2.8458 percent.

The U.S. labour market remains fragile and job growth has been running below the pace seen in prior economic recoveries, which might lead Fed policymakers to begin tapering by a modest amount, analysts said.

"The jobs market continues to grow, but at a pace that is less than ideal. Nonetheless, all indications are that the Fed is poised to announce tomorrow that they will begin to pare back their bond purchases," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Safe-haven Bunds fell after data showed the ZEW German economic sentiment survey for September rose to 49.6 from 42.0 in August, significantly above the 46.0 consensus forecast.

Bund futures settled down 43 ticks at 138.07, and last was 44 ticks lower on the day at 138.06.

(Additional reporting by Blaise Robinson in Paris; editing by Chris Reese, Leslie Adler and Kenneth Barry)