By Saikat Chatterjee
HONG KONG (Reuters) - Asian stocks rose to a three-week high on Thursday while the dollar drifted lower against other currencies as investors consolidated positions ahead of a nail-biting U.S. Federal Reserve interest rate decision.
Financial spreadbetters expected Britain's FTSE 100 (FTSE) to open 0.5 percent higher; Germany's DAX (GDAXI) 0.4-0.5 percent higher; and France's CAC 40 (FCHI) 0.3-0.4 percent higher.
The Fed is considering raising U.S. interest rates for the first time since 2006, although economists are split in their expectations. The Fed will announce its decision at 1800 GMT, with a news conference by Chair Janet Yellen at 1830 GMT.
While financial markets have expected a Fed rate increase for most of this year as the U.S. economy has shown signs of picking up, those expectations have faded in recent weeks thanks to global financial market turmoil, especially in China.
Even if the Fed were to raise rates, many market players expect officials to signal a dovish stance on the pace of future increases, rather than herald a series of interest rate increases.
MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) rose 1.1 percent to its highest level in three weeks, while Japan's Nikkei average (N225) rose 1.33 percent. Australian shares (AXJO) rose 1 percent.
"We think it is going to be a very close call," said Stephen Chiu, a strategist at Mitsubishi UFJ Financial Group in Hong Kong.
"Communicating the future path of interest rates is very important and the Fed would be careful not to signal any excessive tightening given global markets are still very vulnerable."
A narrow majority of economists in a Reuters poll expect the U.S. Federal Reserve to hold fire. Just last week, they had narrowly predicted a rate rise.
Perhaps more worryingly for Asian markets in coming months, earnings growth expectations have been steadily revised lower signalling a bleak economic outlook whether or not the U.S. raises interest rates.
Oil prices held on to Wednesday's sharp gains that followed news of a large U.S. crude drawdown at the key U.S. delivery point of Cushing, Oklahoma. The data eased worries about over supply and helped to boost battered energy stock prices.
That in turn supported Wall Street shares. The S&P 500 index (SPX) rose 0.9 percent to 1,995.31, its highest close in almost a month. It has pared back about half of the losses made in a fall from July to late August.
Precious metal prices jumped as some market players interpreted an unexpected dip in U.S. consumer prices to mean a smaller chance of an immediate rate hike.
Gold prices
The dollar edged lower after the consumer prices figures, with the dollar's index against a basket of six major currencies (DXY) slipping to 95.325 from this week's high of 95.845.
"We believe that the Fed will refrain from raising rates today. But at the same time, it will indicate that it is highly likely to raise rates by the end of the year," said Tomoaki Shishido, fixed income analyst at Nomura Securities.
U.S. money market futures <0#FF:> held steady, pricing in about a one-in-four chance of a Fed rate rise on Thursday.
On the other hand, the yield on the U.S. two-year note rose to a 4 1/2-year high of 0.819 percent (US2YT=RR) overnight as investors expect the Fed to raise interest rates soon, even if it does not do so later on Thursday.
The rise in U.S. Treasury yields likely also reflected selling by China, which has intervened in currency markets to support the yuan, market players said.
China's holdings of U.S. Treasuries dropped to $1.241 trillion in July from $1.271 in June, data showed on Wednesday.