The dollar fell to a three-week low against the euro and Treasuries steadied ahead of a Federal Reserve policy meeting on Tuesday, while stocks held near a two-year peak, supported by optimism over Chinese growth.

Fed officials are expected to assess its latest $600 billion bond-buying program but not signal any shift in its buying intentions, even though a planned extension of tax cuts could provide a boost to the economy.

Monday's news on China's moves on reserve requirements supported world stocks and commodities as expectations rose Beijing is unlikely to aggressively cool down its economy at a time when the rest of the world relies on China's robust growth.

Markets have been breaking out into a higher range and now consolidating, Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin, said. Investors are awaiting for the Fed for clues about the economy. MSCI world equity index <.MIWD00000PUS> and the Thomson Reuters global stock index <.TRXFLDGLPU> both rose around a third of a percent. The MSCI index is just below a two-year high set in November.

The FTSEurofirst 300 index <.FTEU3> was down 0.1 percent.

Emerging stocks <.MSCIEF> added half a percent.

Chinese stocks rose 0.1 percent <.SSEC>. A leading official newspaper reported China will probably target a limit of about 7.5 trillion yuan ($1.1 trillion) in new loans next year, an indication that policy could be slightly looser than expected.

U.S. crude oil rose 0.3 percent to $88.88 a barrel.

The bund futures rose 0.2 percent.

U.S. Treasury futures steadied in Asia after a turbulent session on Monday that took the benchmark 10-year bond yield to a six-month high of 3.39 percent.

Treasuries have suffered a sharp sell-off since news of a tax deal between President Barack Obama and Republican lawmakers sparked concerns over a widening federal budget gap while also boosting hopes for U.S. economic growth.

The dollar <.DXY> fell 0.3 percent against a basket of major currencies while the euro rose to a three-week high of $1.3475.

The dollar is under pressure as Treasury yields, especially in the medium-term zone, have dropped quite significantly ahead of the FOMC meeting, said Gen Kawabe, manager at Chuo Mitsui Trust and Banking.

(Editing by Patrick Graham)