US stocks flat, dollar lower as traders brace for Fed easing

By Isla Binnie and Sruthi Shankar

NEW YORK (Reuters) -Wall Street's main stock indexes were broadly flat in early trade on Wednesday and the dollar weakened as traders weighed up the odds that the Federal Reserve's expected decision to cut interest rates for the first time in more than four years later in the day delivers a supersized move.

Financial markets are fully pricing in a quarter-percentage point rate cut, while the odds of a more unusual half-point cut stood at 63% by Wednesday, according to LSEG data, up from as little as 14% a week ago.

"Given the uncertainty that's still looming, we can expect a decent market reaction whatever the decision is," a Deutsche Bank analyst said in a note.

"You'd have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today," they added.

The Dow Jones Industrial Average fell 0.16%, to 41,537.83, the S&P 500 0.03%, to 5,633.04 and the Nasdaq Composite ticked up 0.07%, to 17,638.87.

MSCI's index of world stocks fell 0.82 points, or 0.10%, to 827.88 after having touched a two-week high a day earlier, just below an all-time high.

The U.S. currency edged lower, handing back some of the gains it made on Tuesday, when unexpectedly robust U.S. retail sales data was interpreted as weakening the case for aggressive Fed easing.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro fell 0.13% to 100.78.

AFTER THE FED

Chances of the Fed kicking off its easing cycle with a super-sized cut of 50 basis points (bps) were revived in recent days partly by media reports raising the prospect of more aggressive action.

The announcement is slated for 2 p.m. ET.

A 25 bps cut would indicate central bankers think inflation is cooling and economic growth is slowing but not headed for a sharp downturn. A larger cut could be seen as a sign of deeper concerns about the health of the economy.

Strategists are looking for signs of plans for the future.

"We love this debate - everyone's very focussed on 50 or 25 but what is important is that they communicate to the market that they intend to go neutral by next summer," said Samy Chaar, chief economist at Lombard Odier in Geneva.

"The worst that you can get is they go 25 and pretend that everything is normal and that monetary policy still needs to be restrictive."

U.S. bond yields ticked higher. The 2-year Treasury yield, the most sensitive to short-term rate expectations, edged up 5.2 basis points to 3.6444%, from 3.592% late on Tuesday.

The benchmark 10-year yield rose 4.3 basis points to 3.685%, from 3.642% late on Tuesday.

Both the Bank of Japan and the Bank of England are due to meet this week.

Against the Japanese yen, the dollar weakened 0.48% to 141.71.

The euro gained 0.14% at $1.1129. Sterling strengthened 0.54% to $1.3231, after data showed British inflation held steady in August, but picked up in the services sector, adding to bets in financial markets that the Bank of England will keep interest rates on hold on Thursday.

Meanwhile, gold rose 0.07% to $2,571.45 an ounce, having touched record highs earlier this week.

Crude oil pulled back after gaining about $1 a barrel on Tuesday as tensions escalated in the Middle East.

U.S. crude futures declined 0.24% to $71.07 a barrel, and Brent fell to $73.52 per barrel, down 0.3% on the day.

(Reporting by Kevin Buckland in Tokyo and Sruthi Shankar in London; Editing by Angus MacSwan, Christina Fincher and David Evans)