* Dollar index off its Monday’s peak ahead of Fed meeting
* Markets expect Fed to raise rates twice in 2017
* Russian rouble biggest winner from Trump victory, oil rally
By Hideyuki Sano
TOKYO, Dec 14 (Reuters) - The dollar took a breather on Wednesday as investors looked to whether the Federal Reserve will signal any acceleration in the pace of future rate increases to deal with an expected ramp-up in fiscal spending under President-elect Donald Trump.
In its policy meeting ending later in the day, the Fed is all but certain to raise its interest rate target by 0.25 percentage point to 0.50-0.75 percent, which would be just the second rate hike since the financial crisis in 2007-08, following the tightening last December.
“The markets think a rate hike is a certainty so the focus is on the outlook for next year. I think they will maintain their previous projections to raise rates twice next year but if they turn more hawkish, the dollar will test its upside again,” said Shinichiro Kadota, chief FX strategist at Barclays.
The dollar’s index against a basket of six major currencies stabilised around 101.05 in early Asian trade, having slipped from 101.78 touched early on Monday.
The euro traded little changed at $1.0628, off Monday’s one-week low of $1.0525.
Against the yen, the dollar traded at 115.20 yen, backing off a tad from Monday’s 10-month peak of 116.12 yen.
Some players were eager to take profits from the dollar’s massive rally of about 10 percent against the yen since the Nov 8 U.S. election.
Expectations that Trump will cut taxes, boost fiscal spending and raise U.S. growth over the near-term lifted U.S. bond yields and stock prices, making the dollar more attractive.
Inflation is also likely to heat up if Trump moves to implement his more controversial campaign promises, such as deporting illegal immigrants and slapping tariffs, further boosting U.S. bond yields.
Although many investors had long thought the Fed will raise rates very slowly and cautiously, especially under dovish Chair Janet Yellen, Trump’s surprise election victory last month has drastically shaken up that assumption.
The two-year U.S. debt yield rose to a 6 1/2-year high on Tuesday and U.S. money market futures <0#FF:> are pricing in almost two rate hikes next year.
That is a sea change from before the election, when they were not fully pricing in even one rate hike in 2017.
Commodity-linked currencies were supported by strong rises in oil prices after OPEC and some of its rivals reached their first deal since 2001 to jointly reduce output to tackle global oversupply.
The Australian dollar traded at $0.7494, having hit a near one-month high of $0.7524 on Tuesday.
The Aussie also edged near its March peak of 86.66 yen , a break of which could open a way for a test of above 90 yen touched last year.
The Canadian dollar stood at C$1.3135 per U.S. dollar , after having risen to as high as C$1.3102 to the dollar on Tuesday, an eight-week high.
The biggest winner in the past few sessions from rallying oil prices was the Russian rouble, which rose 5.4 percent over the past week against the dollar to hit a 16-1/2-month high.
The Russian currency is the best performing currency since Trump’s upset. (Editing by Shri Navaratnam)