By Marc Jones
LONDON (Reuters) - The dollar rose but equity markets stuck within tight ranges on Tuesday as uncertainty over the future of the U.S. monetary stimulus program kept investors on edge ahead of the Federal Reserve's policy meeting.
The U.S. central bank kicks off a two-day gathering later in the day, with markets on high alert for guidance on when and how quickly it will wind down its bond buying programme.
After a calmer session for Asian markets, European shares recovered from an early dip to be unchanged by the mid session point, while U.S. futures pointed to a firmer day for Wall Street.
The pickup in European shares was aided by a rise in investor sentiment in Germany, suggesting Europe's largest economy is on the slow road to recovery, but it was only a brief distraction ahead of the Fed.
The Fed meeting has taken on greater significance since its Chairman Ben Bernanke said in May stimulus plans could be scaled back if the U.S. economy gains momentum, comments which have brought this year's equity market rally to a shuddering halt.
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"I don't think we will get any great retreat from the expectation that tapering (slowing of bond purchases) is really quite imminent," said Nick Beecroft, senior market analyst at Saxo Bank.
"I think the Fed is secretly sitting with its fingers crossed, hoping that the froth continues to be skimmed off asset markets. I don't think they will be bothered at all if the S&P500 or other risk markets fall 5 or 10 percent, as long as it didn't happen in a (single) day."
ASIAN SLIDE
The dollar, which should gain from any hint of an early Fed tapering, recovered from a recent two-month low against the Japanese yen, gaining 1 percent to 95.40 yen.
It also firmed against many other Asian currencies, sending the Indian rupee to a record low, and knocking as much as 0.8 percent off the value of the Malaysian ringgit and the Philippine peso.
The sell-off was prompted by the expectation that yield-hungry foreign investors will sell out of emerging markets, especially Asia's local-currency bonds, should the Fed end its ultra-loose monetary policy.
Investors are also worried about the outlook for China, whose economy grew at its slowest pace for 13 years in 2012, and continues to surprise on the downside.
The slowdown puts pressure on China's central bank to ease rates just as the Fed considers winding back, although concern that providing cheaper credit could exacerbate a rise in local property prices has weighed against any move.
DAY AT THE ZEW
In the debt markets, German government bonds fell in line with U.S. Treasuries on expectations the Fed may signal it is moving closer to trimming its bond purchases.
Germany's ZEW business sentiment survey showed an uptick in the mood in Germany, as expected, though its impact was limited, coming a day after the Bundesbank said it saw a summer slowdown.
Elsewhere figures showed car sales in Europe plunged to the lowest level in two decades last month.
"The ZEW index has moved more or less sideways since spring. Analysts still expect that the economy will recover. But I don't see a real breakthrough for broadly based optimism," said Ralph Solveen at Commerzbank.
Caution ahead of the Fed meeting restricted growth-linked metals like copper, as well as safe-haven and inflation-linked assets such as gold, to minor moves.
Brent crude eased towards $105 a barrel, falling from an 11-week high, as fears that the tensions in Syria could spark conflict in more oil-rich parts of the region provided a prop for the otherwise Fed-focused market.
"The market has certainly built in a risk premium (from Syria) into prices, and this should keep it supported despite fundamentals suggesting that there is more than enough oil out there to buffer a disruption," said Carl Larry of Oil Outlooks and Opinions.
(Additional reporting by Richard Hubbard; Editing by John Stonestreet and Louise Heavens)