Shutterstock photo* Dollar falls ahead of FOMC meeting
* Euro, yen gain after Tuesday's falls
* Mexican peso, Canadian dollar surge on NAFTA news
By Tommy Wilkes
LONDON, March 21 (Reuters) - The dollar retreated fromthree-week highs on Wednesday as traders took some profitsbefore the Federal Reserve's first expected rate rise of 2018and focused on whether it will indicate three or four increasesare likely this year.
The dollar .DXY fell 0.2 percent against a basket ofcurrencies, after hitting a nearly three-week high on Tuesday.With the U.S. currency weakening, the euro and yen were able torecover some losses made on Tuesday.
The dollar has been stuck in a trading range as investorswait to see whether the Fed will forecast four rate increasesthis year, instead of the median three seen in December'squarterly forecast.
Following the Fed's announcement at 1800 GMT, Jerome Powellwill hold his first news conference as Fed chief at 1830 GMT.
Many analysts doubt the dollar can rally much, since so manyinvestors remain bearish. The dollar sold off in January andFebruary on bets that trade and budget deficits would pull itdown. Comments by the Treasury Secretary that a weaker dollarwas good for the United States also weighed on the currency.
The Fed "will have to go some to really move the needle onmarket thinking or indeed, to take the dollar out of its currentrange and the FX market out of its mindset," said Kit Juckes,chief FX Strategist at Societe Generale.
The two-year U.S. treasury yield US2YT=RR jumped to 2.3449percent on Tuesday.
As the U.S. currency fell, the euro EUR= - which has beendriven by dollar-related news in recent weeks - gained 0.3percent to $1.2275, having fallen 0.78 percent on Tuesday andhitting a near three-week low of $1.2240.
Adam Cole, chief currencies strategist at RBC CapitalMarkets, said a "knee-jerk reaction" to the Fed flagging fourhikes this year may see the dollar strengthen against the euro.
Cole said he remained moderately bullish on the dollar,because the Fed's raising rates faster than other central bankssupported the currency.
Against the yen, the dollar fell 0.2 percent to 106.345 yenJPY= , after Tuesday's gains of 0.4 percent, though trading wasslowed by a public holiday in Tokyo.
MEXICAN PESO, CANADIAN DOLLAR RALLY
Elsewhere, the Canadian dollar and Mexican peso gained afterreports that the U.S. government administration had dropped ademand related to auto exports, removing a barrier to a deal fora new North American Free Trade Agreement urn:newsml:reuters.com:*:nL3N1R3196.
The Canadian dollar rose 0.5 percent to C$1.3003 to the U.S.dollar CAD=D4 , its best level since March 15. The peso rosemore than 1 percent MXN=D2 to a one-week high of 18.559 perU.S. dollar.
The Australian dollar fell to a three-month low of $0.7679AUD=D4 on Tuesday but recovered some ground on Wednesday totrade up marginally at $0.7686.
Australia, a big producer of basic commodities, is among themost vulnerable economies should U.S. protectionism lead to atit-for-tat reprisal from China, a key consumer of commodities urn:newsml:reuters.com:*:nL1N1R122D.
Sterling gained 0.5 percent against the dollar to $1.4065GBP=D3 after data showed U.K. wages grew at their fastest pacefor more than two years, supporting bets that the Bank ofEngland would raise interest rates as early as May urn:newsml:reuters.com:*:nL8N1R32IE. (Editing by Larry King) ((thomas.wilkes@thomsonreuters.com))
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