World stocks climbed on Tuesday while the dollar was corralled as investors bet the U.S. central bank will repeat its vow of keeping interest rates low for an extended period after its monthly meeting.
The Federal Reserve is expected to leave benchmark rates near zero given lingering labor market weakness and nagging doubts about the solidity of the economic recovery.
Given the market's reaction to the surprise cut in the discount rate, we suspect that the FOMC will be cautious in their language, said Mitul Kotecha, head of global FX strategy at Credit Agricole, referring to the policy setting arm of the Fed -- the Federal Open Market Committee (FOMC).
Policy will remain unchanged and we expect the majority of the FOMC to remain comfortable with the notion that rates will stay low for an 'extended period'.
Leaving out 'extended period' in the statement would likely cause U.S. Treasury yields to rise but may boost the dollar as it would be seen by the market as a further step toward normalizing ultra-loose monetary policy, analysts said.
MSCI's all-country world index <.MIWD00000PUS> rose 0.3 percent, with the pan-European FTSEurofirst 300 <.FTEU3> gaining 0.7 percent. Japan's Nikkei closed 0.3 percent <.N225> lower as the market took a breather after having risen to a seven-week high in the previous session.
The Fed's decision comes as investors braced for China to further tighten policy following a recent raft of strong economic data and inflation at a 16-month high in February.
This has been keeping equity investors cautious.
The Bank of Japan, which will announce the outcome of its meeting on Wednesday, is leaning toward easing monetary policy again, under pressure from a government calling for action to beat deflation, sources said, but the board is split on how to justify the move.
EURO OUTLOOK HINGES ON GREECE
In the forex market, the dollar index <.DXY>, a gauge of its performance against six other currencies, slipped 0.1 percent to 80.18, but was still some way off a three-week low of 79.692 set on Friday.
No one seriously expects much change in the Fed's language, but the market thinks that if there is a risk it will be that they are more upbeat, which would benefit the dollar, said Jeremy Stretch, currency strategist at Rabobank in London.
The euro also struggled and was little changed against the dollar and yen at $1.3677 123.84 yen.
Analysts said a rescue plan for Greece outlined by euro zone finance ministers on Monday lacked detail and was unlikely to provide the euro with firm support for now.
Only a complete plan, which defines not just the aid payments but also the conditions it is linked to, the control mechanisms and the sanctions to be taken in case the conditions are breached, would have the potential of causing a sustainable correction in euro/dollar, said Commerzbank forex analysts in a note.
Finance ministers from the 16-country euro zone agreed on Monday to mobilize financial aid for Greece rapidly if needed but revealed little of how their standby plan for the debt-stricken nation would work.
With stocks rising, demand for lower risk government debt eased, driving yields higher. The benchmark U.S. 10-year note yield climbed 1.1 basis points to 3.71 percent, while the euro zone benchmark German Bund yield edged up one basis point to 3.165 percent.
U.S. crude futures slipped 0.3 percent to $79.54 a barrel, still shaky after falling 1.8 percent to the lowest close in two weeks on Monday.
Spot gold rose to around $1,113 an ounce, up more than $4 from New York's notional close, while copper prices gained one percent to $7,371 a tonne.
(Additional reporting by Jessica Mortimer, editing by Mike Peacock)