Asian markets held their breath on Wednesday as investors counted on the Federal Reserve to launch only a modest scaling back of stimulus later in the day, with all assets vulnerable to any hint of hawkishness from the world's most powerful central bank.
Expectations are that the Federal Open Market Committee (FOMC) will be measured with any cuts to its $85 billion in monthly asset buying, while also seeking to reassure investors that the day of an actual policy tightening is still distant.
That kept the dollar pinned near a four-week trough against a basket of major currencies. On the yen, the greenback bought 99.15, not far off Monday's two-week low of 98.45.
The euro idled at $1.3354, near the recent 2-1/2 week peak of $1.3385.
Caution ruled in stock markets, with MSCI's broadest index of Asia-Pacific shares outside Japan flat at 464.14. Japan's Nikkei firmed 0.8 percent while Australian shares were a fraction lower.
Overnight, the Dow Jones industrial average eked out a 0.2 percent gain, while the S&P 500 added 0.42 percent. Europe's FTSEurofirst 300 index fell 0.46 percent.
For the Fed, consensus has congealed around a reduction of $10-$15 billion a month with all purchases ending by the middle of next year. Yet even that cautious timetable would be contingent on the economy performing as well as expected.
With such an outcome largely priced in, it could lead Treasuries and the dollar to rally modestly. A slower tapering would tend to benefit bonds and stocks but hurt the dollar.
The bigger reaction would likely come if the Fed pulled back more aggressively, as that would lead market to price in an earlier start to rate rises as well.
That would be especially painful for emerging market countries that rely on foreign capital to fund current account deficits, with India and Indonesia among the most vulnerable.
A LOT TO CONSIDER
Still, dealers warned against a hasty reaction as there were so many moving parts in play.
As well as the tapering, the Fed may chose to alter its threshold for tightening, perhaps by lowering the trigger level on unemployment from the current 6.5 percent.
It will also publish its first economic forecasts for 2016 and the stronger the picture the harder it will be to convince markets that any future rise in interest rates will only be slow and measured.
Indeed, the Fed has already had trouble convincing the market that it intends to keep rates near zero out to 2015 no matter how much the economy improves.
The decision and economic projections are out at 1800 GMT while Fed Chairman Ben Bernanke starts his press conference half an hour later. Often markets can react violently to the former, then completely reverse course depending on what Bernanke says.
"We expect Bernanke's press conference to be dovish. The Fed will want to temper market expectations that tapering will be rapid or that FOMC participants have brought forward their expectations for the first increase in rates," says Joseph Capurso, currency strategist at Commonwealth Bank of Australia.
"While the dollar may soften after the FOMC meeting, our medium term view of a stronger dollar is unchanged," he added, citing higher US yields and the diverging outlook for rates between the United States and other rich nations.
While yields on 10-year Treasury notes were steady at 2.85 percent on Wednesday, that is up from just 1.62 percent back in May before the Fed first raised the spectre of tapering.
For commodities, the more dovish the outcome from the Fed the more supportive for prices.
Copper futures were a shade firmer at $7,084.75 on Wednesday, though still down 11 percent for the year so far. Spot gold faded to $1,303.81 and was threatening a break of major chart support that could see it to $1,272 in a hurry.
Oil prices were pressured as a deal averting any imminent U.S. attack on Syria calmed fears of a disruption to Middle East supplies and after output resumed at a large oilfield in western Libya.
Brent crude for delivery in November fell 43 cents to $107.76 a barrel. U.S. crude for October delivery held steady at $105.42 a barrel.