* European shares fall, U.S. stock futures flat
* Fed tipped to hike rates 25 bps later on Wednesday
* Some caution in case Fed hints at a faster pace of
* Dollar steady, U.S. bond yields fall
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
(Updates prices, adds BOJ)
By Dhara Ranasinghe
LONDON, Dec 14 World stocks and the U.S. dollar
edged lower, while government bond yields fell, with investors
certain the Federal Reserve will lift interest rates for the
first time in a year on Wednesday but less so about what it may
do in 2017.
European shares fell 0.4 percent and U.S. stock
futures were flat, suggesting a cautious start to Wall
Street trading after Tuesday's stock market rally to all-time
Asian stocks outside Japan eked out just a 0.1 percent
gain, while benchmark indexes in Japan
and China dithered either side of flat with investors
reluctant to push shares much higher before the Fed meeting.
The Fed is widely tipped to lift interest rates 25 basis
points to 0.50-0.75 percent at the end of a two-day meeting on
Wednesday. Its rate announcement is due at 1900 GMT, followed by
Chair Janet Yellen's news conference 30 minutes later.
It would be the Fed's first interest rate hike in a year and
its second since the financial crisis.
With a rise fully priced in by markets, eyes are on the
Fed's economic and rate "dot plots" for a sense of how
policymakers think President-elect Donald Trump's policies will
impact growth and inflation.
"Last year the Fed guided the markets to expect at least
four rate rises this year, guidance that proved to be woefully
wide of the mark, and it is likely that they won't want to make
the same mistake again," said Michael Hewson, chief market
analyst at CMC Markets.
"That suggests that Fed chief Janet Yellen can expect some
serious cross-examination of how the FOMC (Federal Open Market
Committee) view not only the economy, but also President elect
Donald Trump's plans for it."
For others, the challenge for Yellen is how to signal
further rate increases without triggering strong gains in the
dollar that could undermine growth.
The dollar index, which measures against a basket of
six major currencies, hit 14-year peaks last month on
expectations for higher inflation and interest rates.
The euro traded at $1.0646 on Wednesday, up 0.2
percent on the day and off a recent 20-month trough at $1.0505.
The dollar was also a touch weaker against the yen at 114.92
, while the dollar index was 0.2 percent lower at 100.88.
"Janet Yellen is in a corner for the December meeting," said
Nicolas Forest, global head of fixed income at Candriam
Investors Group. "She has to hike interest rates but the dollar
is strong, so she has to decide between a dovish and a hawkish
Treasuries have already priced in a rate hike and more, with
10-year yields pulling back from peaks seen earlier this week
just above 2.5 percent.
In contrast to the Fed, the European Central Bank only last
week extended its asset-buying campaign and moved to purchase
more short-term debt.
Germany's 2-year government bond yield, trading at minus
0.765 percent, is within sight of recent record
lows, while U.S. equivalents are reaching ground last trod in
April 2010 at around 1.18 percent.
As a result, the spread between U.S. and German two-year
yields is at its widest since late 2005, with Treasuries
offering a mouth-watering premium of 192 basis points.
The Bank of Japan, meanwhile, increased government bond
purchases in regular market operations on Wednesday for the
first time since adopting its yield curve control in September,
signalling its readiness to intervene against unwelcome rises in
long-term interest rates.
Oil ran into profit-taking following a reported rise in U.S.
crude inventories and an estimate that OPEC may have produced
more crude in November than previously thought.
U.S. crude futures, which hit a high of $53.41 on
Tuesday, were down 71 cents at $52.27 a barrel. Brent crude
eased 70 cents to $55.03.
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Wayne Cole in SYDNEY; Editing by Robin