FOREX-Dollar inches higher in choppy trading ahead of Fed

* U.S. CPI (Other OTC: CPICQ - news) headline number unchanged

* Dollar marginally up, focus is on the Fed's decision

* Swedish crown rises after widely-expected rate cut

* Aussie dollar falls to 3-1/2-month low vs U.S. dollar

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 17 (Reuters) - The dollar edged higher on Tuesday, moving in narrow ranges, as investors continued to adjust positions ahead of this week's key decision on bond-buying by the U.S. Federal Reserve.

The U.S. currency ended last week slightly lower against a basket of major currencies and investors are buying back the greenback this week to square up positions, analysts said.

As the Fed begins its two-day policy-meeting on Tuesday, market participants in general expect no major policy change, but the Fed could start to lay the groundwork for a reduction in the Fed's economic stimulus that could occur in the first quarter of the year.

Brian Dangerfield, currency strategist, at RBS Securities in Stamford, Connecticut said Tuesday's benign inflation data "justifies the Fed's accommodative stance," and has made a tapering of the U.S. central bank's asset purchases this week less likely. But he added that the Fed could still move to taper regardless, given recent strong U.S. employment and manufacturing numbers.

U.S. data on Tuesday showed that the consumer price index was restrained last month by declines in gasoline and natural gas prices, after slipping 0.1 percent in October. In the 12 months through November, the CPI rose just 1.2 percent. It had increased 1.0 percent in October, the smallest advance since October 2009.

The dollar index was up 0.1 percent at 80.152. It was down 0.7 percent the last three weeks.

The euro, which reached a six-week high against the dollar last week, slipped 0.1 percent to $1.3746, shrugging off an upbeat German sentiment survey. That followed a strong German PMI report on Monday.

Investors were hesitant to be long risk ahead of the Fed decision.

The chances of the Fed starting to taper its huge bond-buying program this month or next have increased after a run of upbeat data, including strong November industrial production, although a majority of economists polled by Reuters still expect the change to come in March.

"It doesn't make sense to be too long risk going into the (Fed) ... meeting," said Peter Kinsella, a currency strategist at Commerzbank (Xetra: CBK100 - news) , who also pointed to low market liquidity.

He said he does not expect tapering to begin this week but added: "The question is what guidance the Fed comes out with ... What it says tomorrow might be the real, real important bit."

Carl Hammer, chief currency strategist at SEB (Paris: FR0000121709 - news) in Stockholm, said he expects the Fed to start tapering by $5-10 billion and to lower the unemployment threshold to 6 percent.

In Sweden, the Riksbank cut the repo rate as widely expected. In reaction following the widely-telegraphed move, the euro slipped 0.1 percent against the Swedish crown to 9.0340 crowns. Some investors are now betting the crown's weakness is largely over.

The euro's softness on Tuesday comes after a strong rally since the summer as banks repay cheap European Central Bank loans, which has tightened money markets.

Another factor driving euro strength this year has been European banks repatriating funds to shore up their capital bases before an ECB Asset Quality Review (AQR). EU banks reduced their assets by 817 billion euros between December 2011 and June 2013, according to the European Banking Authority.

The Australian dollar, meanwhile, fell to a 3-1/2 month low of US$0.8895, after the release of the minutes of the Reserve Bank of Australia's Dec. 3 policy meeting. The RBA said the Aussie is still uncomfortably high despite the fact it has weakened noticeably over the past month.

Australia's government has also abandoned any intentions of returning to a budget surplus and predicted deficits for the next decade without spending cuts..

The Aussie dollar was last down 0.5 percent at US$0.8899.