Dollar edges higher as Fed meets to set monetary policy

* RBA says inflation still too low, Aussie drops 0.7%

* Markets now focus on Fed, BoE meetings

* Graphic: World FX rates Link

By John McCrank and Tommy Wilkes

NEW YORK/LONDON, Nov 2 (Reuters) - The dollar rose slightly as the U.S. Federal Reserve prepared on Tuesday to kick off its two-day policy meeting where it was expected to announce the start of tapering of its massive asset purchases put in place at the start of the COVID-19 pandemic.

Investors in recent weeks have priced in a wave of tightening from central banks as they bet policymakers are sufficiently concerned about rising inflation to end pandemic-era levels of easing.

The Reserve Bank of Australia (RBA), in the first of several central bank meetings this week, on Tuesday sounded a more dovish tone that investors had anticipated, weakening the Aussie dollar.

The Fed announces its policy decision on Wednesday, and the Bank of England will do so on Thursday.

"The theme of inflation getting out of control and forcing central banks into action is unfolding," said Edward Moya, a senior market analyst at Oanda.

The dollar index =USD , which measures the greenback against a basket of peer currencies, was up 0.13% at 94.050.

The market has fully priced in the Fed's expected tapering announcement, and will be looking for any clues as to when the central bank will begin raising rates, similar to last week's European Central Bank meeting.

"The Fed is potentially going to do a better job than the ECB at pushing back those rate hike expectations, so I would anticipate that despite tapering, despite a possible knee-jerk move higher in yields, that we could see the dollar settle lower," Moya said.

Australia's central bank did not display the hawkish pivot many had expected, sending the Aussie dollar down 0.9% to $0.7452 AUD=D3 , its weakest since Oct. 19.

The RBA stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond.

"Unlike other central banks (like the ECB recently), the RBA's message was successful in at least marginally scaling down hawkish bets, although markets are still pricing in 76bp (basis points) of tightening in the next 12 months," ING analysts said in a note.

Sterling GBP=D3 was on the back foot, slipping 0.27% to $1.3626, ahead of Thursday's Bank of England meeting, where the market is pricing in an interest rate hike.

The euro EUR=EBS edged 0.21% lower to $1.15825.

Elsewhere, the Swiss franc briefly hit a new 18-month high versus the euro EURCHF=D3 . The single currency dropped to as weak as 1.0544 francs - the lowest since May 2020 - before bouncing back to trade at 1.0581, up 0.3% on the day.

The franc has been strengthening versus the U.S. dollar, and was up 0.55% at $0.9141 CHF=D3 .

Marshall Gittler, Head of Investment Research at BDSwiss Holding, noted that sight deposits data suggested the Swiss National Bank - which worries about a stronger franc hurting the Swiss economy - was not intervening as actively to arrest the franc strength as it had during previous moves higher.

"This could be the way the SNB goes along with the global trend toward tighter monetary policy, only doing it through the exchange rate rather than through its policy rate," he said.

World FX rates Link

Reporting by John McCrank in New York and Tommy Wilkes in
London; Editing by Ed Osmond, Peter Graff and Mark Heinrich

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