4 Min Read
* Dollar index supported with U.S. yields near 3-month highs
* Wait-and-see mood before Fed meeting limits movements
* Comments from ECB officials temper euro (Updates prices, adds details and quotes)
By Shinichi Saoshiro
TOKYO, March 14 (Reuters) - The dollar inched up against a basket of currencies on Tuesday as U.S. Treasury yields extended their rise ahead of an expected interest rate rise by the Federal Reserve.
The euro pulled back from one-month highs after dovish-sounding comments from European Central Bank officials tempered its recent surge.
With a rate increase already seen as a done deal, investor focus was on what kind of a message the Fed would deliver after its two-day meeting starting later on Tuesday.
"The latest rise in Treasury yields is underpinning the dollar, but it is a wait-and-see mood that is mostly prevailing in the market ahead of the Fed's decision," said Shin Kadota, senior currency strategist at Barclays in Tokyo.
"Expectations for a hawkish dot plot was a factor that has pushed up the dollar recently, with hopes for the number of times the Fed could hike rates this year having increased to four from three."
The "dot plot" is policymakers' rate projections and provides a view into their interest rate outlook.
The dollar index against a group of major currencies was up 0.1 percent at 101.410, adding to modest gains made the previous day.
The U.S. currency was steady at 114.850 yen, having gone to 115.510 on Friday, its highest since Jan. 19.
The euro was effectively flat at $1.0651.
The common currency had climbed to a one-month high of $1.0714 on Monday, boosted after some members of the ECB's Governing Council discussed the possibility of higher interest rates at last week's policy meeting.
But its rise was tempered later on Monday after ECB Governing Council member Jan Smets reportedly said last week's policy meeting was not a signal of coming policy change. Bank of France Governor Francois Villeroy de Galhau also said rising inflation in the euro zone was highly exaggerated.
Caution ahead of upcoming elections in Holland also capped the euro. The Dutch will vote on Wednesday in an election that was seen as a test of anti-immigrant sentiment.
"The market faces a series of event-related risks. It's hard to predict whether that would be the Dutch elections, the Fed policy decision, (U.S. President Donald Trump's) budget proposal or the G20 meeting, but the dollar faces significant downside risks," said Masashi Murata, senior strategist at Brown Brothers Harriman in Tokyo.
Murata added that recent expectations for four U.S. rate increases this year looked excessive, and that the Fed meeting could help cool exaggerated policy tightening expectations.
The Trump administration's fiscal 2018 federal budget plan will be released on Thursday, and G20 finance ministers and central bankers meet in Germany on Friday.
Sterling was a touch lower at $1.2200, its rise overnight stalling after parliament passed a legislation giving British Prime Minister Theresa May the power to begin the EU exit process. May has now cleared the final hurdle standing between her and the start of the divorce talks.
The pound had gained 0.4 percent overnight after Scotland's First Minister Nicola Sturgeon demanded a fresh Scottish independence referendum but said it should take place at the earliest in late 2018.
The Australian dollar was down 0.15 percent at $0.7561 , giving back some of the previous day's gains made when the dollar stumbled against the euro.
The 10-year U.S. Treasury note yield was at 2.616 percent after rising overnight to 2.628 percent, its highest since mid-December. (Editing by Randy Fabi and Jacqueline Wong)