GLOBAL MARKETS-Dollar muscles higher ahead of crucial Fed meeting

(Adds analyst comment, updates prices)

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Dollar gains for fifth session ahead of Fed meeting

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Stocks tread water before Fed announcement at 1800 GMT

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Yen hits 4-month low a day after BOJ ends negative rates

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Benchmark bond yields dip from recent peaks

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Oil weakens, gold sags from record high

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Graphic: World FX rates http://tmsnrt.rs/2egbfVh

By Koh Gui Qing and Marc Jones

NEW YORK/LONDON, March 20 (Reuters) - The dollar rose for a fifth straight session on Wednesday, while stock and bond markets treaded water as traders braced for what could be a crucial Federal Reserve meeting later in the day.

Japan's yen was at a four-month low a day after the Bank of Japan finally ditched its sub-zero rates, but the focus was already on whether the Fed signals two U.S. rate cuts are now likely this year rather than the three markets have been hoping for.

Its quandary is whether progress on inflation has stalled and, if so, whether U.S. rates - which drive the global cost of borrowing - need to stay in the current 5.00%-5.25% range longer than many - including investors, consumers, politicians and U.S. central bank officials themselves - had expected.

"We expect rates to remain unchanged and for the communication to reiterate that greater confidence that inflation is moving back to the target level is needed before it would be appropriate to reduce the target range," said Henk Potts, a market strategist at Barclays Private Bank.

"In our view, we see scope for the Fed to start cutting rates in June, however, the path of policy still remains very data-dependent.

Stocks on Wall Street were little changed as investors stayed on the sidelines before the Fed announces its decision at 1800 GMT.

The Dow Jones Industrial Average was steady at 39,135.02, the S&P 500 gained 2.36 points to 5,180.87 and the Nasdaq Composite added 4.54 points to 16,171.33.

The greenback stood almost 0.13% higher on the day, while the pound lost ground after some softer-than-expected UK inflation data.

The pan-European STOXX 600 index was also little changed, although shares of Kering, the maker of luxury Gucci goods, tumbled after a hefty profit warning

Bond markets were laser-focused on the Fed. Benchmark U.S. 10-year Treasury yields, off a 2024 high hit this week, were down 1.3 basis points at 4.283%.

"The market is completely indecisive on the number of Fed rate cuts," said Mathieu Savary, chief European strategist at BCA Research, describing it as "a complete coin toss" between two and three at the moment.

The yen's fall also showed how markets almost always buy the rumour and sell the fact.

"Really that (BOJ move away from negative rates) should have lifted the yen, but instead it has fallen over 1.5% (over the last couple of days) because people expected the step," Savary said.

The dollar was up 0.5% on the day at 151.61 yen, a fresh four-month high, and close to the 152 level that prompted Japanese authorities to intervene in FX markets in late 2022.

While Japan's historic shift away from negative interest rates and massive stimulus ushered in a new era of economic policy on Tuesday, analysts expect the BOJ's monetary normalisation to proceed at a glacial pace.

That has meant an extended lifespan for the popular "carry" trades where investors borrow yen to buy higher-yielding currencies.

"It is clear that the BOJ tightening has done nothing to shake a belief in carry," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank.

FED AHEAD

Tokyo's Nikkei was closed for a holiday in Japan overnight, while MSCI's broadest index of Asia-Pacific shares outside Japan finished flat although Seoul jumped 1.3%, driven by a 5.6% surge in Samsung's share price after Nvidia said it was qualifying the South Korean chipmaker's high bandwidth memory (HBM) chips.

Chinese shares closed fractionally higher too after the central bank there left benchmark lending rates unchanged, as widely expected. The Shanghai Composite gained 0.5%, while Hong Kong's Hang Seng index crept up 0.2%.

For Fed followers around the world, the risk is that the new economic projections - the fabled dot plot - signal just two interest rate cuts, down from three, or a later start than June to the cutting cycle.

Top European Central Bank rate setters, meanwhile, have endorsed June as the likely month to start its cuts, and some would like as many as four this year.

"Our decisions will have to remain data-dependent and meeting-by-meeting," ECB President Christine Lagarde told a conference in Frankfurt on Wednesday. "This implies that, even after the first rate cut, we cannot pre-commit to a particular rate path."

The euro was down against the dollar on the day, but was at its strongest against the Japanese currency since 2008, rising as much as 164.73 yen.

Oil prices retreated from multi-month highs, however, due to the strong dollar. Brent dropped 1.61% to $85.95 a barrel, while gold prices also ticked down to $2,155.99 per ounce, some distance away from this month's record high of $2,194.99.

(Reporting by Marc Jones in London and Koh Gui Qing in New York Additional reporting by Stella Qiu in Sydney Editing by Mark Potter and Matthew Lewis)