FOREX-Dollar on hold for Fed, euro falls after Draghi stimulus signal

(Recasts; adds analyst quote; updates prices; changes dateline, previous LONDON)

By Kate Duguid

NEW YORK, June 18 (Reuters) - The U.S. dollar was modestly higher on Tuesday morning, as traders held off from making large bets ahead of the Federal Reserve policy announcement on Wednesday.

The Fed begins its two-day policy meeting on Tuesday, and will issue a statement and economic projections at the conclusion of the meeting tomorrow. It is expected to leave its benchmark overnight policy rate unchanged at the current range of between 2.25% and 2.5%. But slow employment growth in May, the ongoing trade war with China, comments by Federal Open Market Committee members and weak inflation data have increased expectations for dovish remarks.

The dollar index was last up 0.17% at 97.728.

"Markets are largely keeping the powder dry ahead of tomorrow's Fed announcement," said Karl Schamotta, chief market strategist at Cambridge Global Payments.

"We're thinking that we are going to see a relatively dovish announcement, certainly acknowledging that risks have grown since the April meeting," said Schamotta, citing the expectation in April that a U.S.-China trade deal was near.

"A recognition of that worsening environment is very likely, but a rate cut at this point I don't think is on the table."

CME Group's FedWatch tool puts the probability of a quarter-point interest rate cut by the Fed on Wednesday at 22.5%, with a 70.2% probability of a rate cut at its next meeting in July.

The dollar's rise was in part pushed by a falling euro , which was down 0.29% at $1.119 after European Central Bank chief Mario Draghi said policymakers will provide more stimulus if inflation does not pick up.

At a speech in Sintra, Portugal, Draghi said the ECB could still cut rates, adjust its guidance, offer mitigating measures to counter the unwanted side effects of negative rates, and also had "considerable headroom" for more asset purchases.

"That is twice in less than two weeks he has warned about the risks to price stability but today we got the clearest hint that a rate cut and/or QE2 could happen," said Kenneth Broux, a currency strategist at Societe Generale in London.

"Draghi's words that the council will deliberate 'in the coming weeks' is implicitly a reference to the next council meeting in July or September."

With benchmark euro zone interest rates already in negative territory and inflation expectations well below central bank forecasts, markets perceived Draghi's comments as dovish. (Reporting by Kate Duguid and Saikat Chatterjee; Editing by Steve Orlofsky)