FOREX-Risk of Fed surprise keeps dollar well bid

* Dollar has been buoyed as cautious investors close shorts * Currency market volatility wallows at 16-month low * Traders watching for clues on timing of Fed tapering By Kevin Buckland TOKYO, June 15 (Reuters) - The dollar hovered near multi-week highs on Tuesday, drawing support from traders wary of a surprise from the U.S. Federal Reserve which is set to begin a two-day policy meeting. Markets expect no immediate changes to monetary policy, but with positioning heavily loaded against the dollar, investors are leery of any shift in tone that could spark a rally. The euro perched at $1.2120, just above a one-month low of $1.2093 it hit last week. The yen hit a seven-session low of 110.15 per dollar. The U.S. dollar index held near the top of its recent range at 90.512. "The Fed is confronted with a balancing act of walking a tight-rope between transition and tantrums," said Vishnu Varathan, head of economics and strategy at Mizuho in Singapore. "(A) solid U.S. economic recovery flanked by inflation at a 13-year high demands some kind of acknowledgement, if not response," he said. "The euro, Aussie, Yen and Singapore dollar (levels) all point to cognisance about upside dollar risks." The Australian dollar has traded sideways this year, despite rapid rises in commodity prices, as markets have focused on U.S. data and the Fed to drive the U.S. dollar. The Aussie slipped marginally to $0.7705 on Tuesday after minutes from the Reserve Bank of Australia's last meeting showed the bank was prepared to keep buying bonds even though the economy has recovered its pre-pandemic output. The kiwi dollar and sterling were also settled in narrow ranges as market volatility gauges tick down to their lowest levels since the pandemic began roiling markets in February and March 2020. Ahead of the Fed's statement and news conference on Wednesday, markets will eye U.S. retail sales and a manufacturing survey later on Tuesday - though mostly as a means of understanding the economic pressure on policymakers. So far Fed officials, led by Chair Jerome Powell, have stressed that rising inflationary pressures are transitory and ultra-easy monetary settings will stay in place for some time to come, although recent economic data has raised concerns that price pressure could force an earlier stimulus withdrawal. "While Powell will tread carefully, I expect that the Fed is warming to a more open discussion about tapering, to be formally announced in the September meeting," Chris Weston, head of research at broker Pepperstone in Melbourne, said in a note to clients. "Any view that cements a formal announcement in September should be modestly USD bullish, but the risks are symmetrical as Powell will be keen to not hurt financial conditions," he said. Nearly 60% of economists in a Reuters poll expect a tapering announcement in the next quarter. In cryptocurrencies, bitcoin was able to steady above $40,000 on Tuesday and is approaching its 200-day moving average - finding support from the promise of fresh investment from major backer MicroStrategy and from Elon Musk. Tesla boss Musk on Sunday flagged that the carmaker could resume transactions using the token if miners can use cleaner energy to process them. Ether also got a small lift in sympathy with its bigger rival, and broke above its 20-day moving average to $2,593.40. ======================================================== Currency bid prices at 418 GMT Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.2124 $1.2121 +0.03% -0.77% +1.2126 +1.2114 Dollar/Yen 110.0650 110.0650 +0.00% +6.56% +110.1450 +110.0600 Euro/Yen Dollar/Swiss 0.8994 0.8995 +0.02% +1.70% +0.9001 +0.8994 Sterling/Dollar 1.4111 1.4105 +0.05% +3.29% +1.4117 +1.4100 Dollar/Canadian 1.2138 1.2149 -0.09% -4.68% +1.2150 +1.2137 Aussie/Dollar 0.7711 0.7712 -0.01% +0.24% +0.7716 +0.7696 NZ 0.7153 0.7144 +0.15% -0.36% +0.7157 +0.7132 Dollar/Dollar All spots Tokyo spots Europe spots Volatilities Tokyo Forex market info from BOJ (Reporting by Kevin Buckland in Tokyo and Tom Westbrook in Singapore; Editing by Kim Coghill)