By Johann M Cherian and Gregor Stuart Hunter
Oct 28 (Reuters) - The US dollar held onto gains on Wednesday after reaching a two-week high ahead of the Federal Reserve's interest rate decision, while sterling was in focus as investors awaited the Andy Burnham government's first budget, hoping it would avoid a heavy reliance on borrowing.
The week is packed with monetary policy decisions by central banks globally as policymakers weigh the path ahead for interest rates against the backdrop of price pressures
due to the Middle East conflict and ballooning sovereign debt costs.
Traders broadly expect no change in Fed monetary policy after a series of Fed officials in recent weeks signaled the need to wait and watch for more signs of persistent price pressures. However, they see a 77% chance that the central bank could lift interest rates by at least 25 basis points in December, the CME Group's FedWatch tool showed.
The euro was flat at $1.1126, trading just shy of the May 2025 low it hit earlier this month, while against the yen, the dollar was a touch lower at 157.83 yen.
"A hold would likely be accompanied by a statement similar to the statement in September when the FOMC hiked underlining the fact that the economy remains resilient," Derek Halpenny, head of research, global markets EMEA & international securities at MUFG, said in a note.
"There is a risk that there could be some dissents and that would certainly be one signal of the leaning and would strengthen the market’s conviction of a hike in December."
The dollar index, which measures the greenback's strength against a basket of six other currencies, was trading at a two-week high of 102.39. The yield on the US 10-year Treasury note was up 1.2 basis points at 5.01%.
UK BUDGET EYED
The spotlight was on the British government's budget plans, with finance minister John Healey expected to detail fiscal spending for the coming year at 1230 GMT.
The pound slipped 0.2% to $1.328 and was about 0.2% lower versus the euro. Sterling was close to a 17-month high versus the euro in the previous session.
Investors will be keen to see how the government expects to raise revenue, with analysts expecting taxes on banks, gambling firms and online marketplaces.
"The expectation is that the UK is maybe a little bit more fiscally constrained than many of its European peers as well. So if the government doesn't do anything too negative, there's room for the market to be somewhat pleasantly surprised in this," said Michael Leithead, head of fixed income at EFG Asset Management.
However, given the recent scrutiny around government debt, any significant reliance on borrowing could spark a selloff in the currency and gilts similar to the market rout during the 2022 "mini-budget" of former prime minister Liz Truss.
CANADIAN RATE HIKE AWAITED; KIWI FALLS
Later in the day, the Canadian central bank is expected to raise its benchmark interest rate by at least 25 basis points in a preemptive move to stop energy-led inflation from spreading into the rest of the economy.
The Canadian dollar was flat versus its US counterpart, last at 1.406 per US dollar.
The European Central Bank and the Bank of Japan are also expected to deliver monetary policy verdicts on Thursday and Friday, respectively, with both central banks expected to leave policy rates unchanged.
The New Zealand dollar sank as much as 1.4% to $0.5598 after the Reserve Bank of New Zealand held interest rates at 2.75%, surprising a large majority of economists who had expected a rate hike.
In cryptocurrencies, bitcoin was 0.9% higher at $81,476.99, while ether climbed 1.3% to $2,371.79.
(Reporting by Gregor Stuart Hunter in Singapore and Johann M Cherian in Bengaluru; Editing by Thomas Derpinghaus and Emelia Sithole-Matarise)
