* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Dec 13 (Reuters) - Investors pressed the pause button on a two-week rally in the dollar on Wednesday before the outcome of a U.S. Federal Reserve meeting at which policymakers are widely expected to raise interest rates for the third time this year.
Though traders expect the Fed to raise interest rates more next year than bond markets are currently anticipating, uncertainty over the U.S. tax bill and the Fed’s outlook is keeping investors sidelined for the moment. Some forecasters nevertheless see a bullish outlook for the dollar at least in the first half of next year.
“Expect the Fed to continue to raise interest rates next year and should see more than the market is currently pricing,” said Nick D’Onofrio, managing partner at North Asset Management, a hedge fund in London.
The dollar was flat against a trade-weighted basket of currencies at 94.03 on Wednesday after rallying more than 1.5 percent so far this month. Despite the bounce, the dollar is down nearly 8 percent so far this year.
U.S. President Donald Trump’s tax cut plans and other economic agenda may be harder to push through following Tuesday’s victory for Democrat Doug Jones in the bitter fight for a U.S. Senate seat in deeply conservative Alabama.
The Republicans’ reduced Senate majority after the race marked by sexual misconduct accusations against their candidate Roy Moore also injects some broader uncertainty into the legislative process.
Against the yen, the dollar slipped 0.2 percent to 113.35 yen, after rising to a four-week high of 113.75 yen on Tuesday.
The euro was flat at $1.1745, after slipping to a three week low of $1.17175 the previous day.
Investors are focusing more on the Fed’s projection on the pace of its rate hikes next year and policymakers’ views on the outlook for inflation.
The Fed will announce its decision on rates at 1900 GMT on Wednesday followed by a statement. Chair Janet Yellen will hold a news conference at 1930 GMT.
Michael Sneyd, global head of FX strategy at BNP Paribas in London expects the dollar to strengthen in the first half of the year by about 3 to 5 percent against the euro.
“The overnight developments in Alabama are not a big concern for now as we expect the legislation on the U.S. tax bill to pass before Doug Jones takes his seat,” Sneyd said who expects the Fed to raise interest rates three times more after today.
Despite expectations of higher interest rates in the U.S. and consequently widening interest rate differentials between the dollar and its rivals, markets have focused on other factors such as the relative growth outlook when it comes to the euro or the unfolding Brexit negotiations for sterling.
Elsewhere, the British pound edged higher to $1.3352 after data showed pay had picked up a little speed in the three months to October.
The numbers showed workers’ total earnings, excluding bonuses, rose by an annual 2.3 percent during that period, compared with 2.2 percent in the three months to September. That beat economists’ expectations for no improvement but was still well below the inflation rate.
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Reporting by Saikat Chatterjee; Editing by Catherine Evans