By Jessica Mortimer
LONDON (Reuters) - The dollar edged lower on Tuesday but traded in a tight range before a two-day Federal Reserve meeting which is expected to result in stimulus being scaled back.
Investors were reluctant to make fresh bets before the policy meeting, which begins later on Tuesday. A recent Reuters poll showed economists expect the Fed to reduce monthly asset purchases by a relatively modest $10 billion.
The dollar was down 0.1 percent versus a basket of currencies at 81.193, having recovered from a four-week low of 80.968 set on Monday.
"It's all a waiting game before the Fed and currencies will be in a tight range," said Niels Christensen, currency strategist at Nordea in Copenhagen. "Yesterday the euro moved towards $1.34, but it had no momentum to move above there."
He said market participants were expecting an "extremely modest announcement" from the Fed, which was likely to mean a reduction in quantitative easing by $10 billion would be enough to push U. S. bond yields and the dollar slightly higher.
The euro was up 0.1 percent at $1.3348, below a peak of $1.3385 hit on Monday, its highest since late August.
Analysts said U. S. inflation data due at 1230 GMT could have an impact on the dollar, though it would have to be well below or well above forecasts to be sufficient to influence thinking on what the Fed will announce.
Germany's ZEW sentiment data at 0900 GMT was likely to show a small rise but analysts did not expect a big market reaction.
The dollar edged up 0.1 percent to 99.17 yen but was expected to stay stuck below chart resistance at 100 yen.
"On top of the size of tapering, what's more important this time is the Fed's forecast of interest rates in 2016, which will give markets an idea on the pace of future rate hikes," said Sho Aoyama, senior market analyst at Mizuho Securities in Tokyo.
Analysts say rate hike expectations hold the key for the dollar because of their impact on short-term U. S. bond yields.
The dollar retreated on Monday after Lawrence Summers' withdrawal from the race to lead the Federal Reserve reduced the chances of a rapid cut in monetary stimulus.
(Additional reporting by Masayuki Kitano in Singapore and Hideyuki Sano in Tokyo, editing by Nigel Stephenson)