FOREX-Dollar holds gains as oil shock eases, Fed in focus

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* Dollar holds onto gains versus yen
* Saudi Arabia taps reserves to ease oil supply shocks
* Fed money market operation unsettles futures pricing
* Sterling grinds higher but sentiment still weak

By Stanley White
TOKYO, Sept 18 (Reuters) - The dollar traded near a
seven-week high versus the yen as oil markets recovered from a
supply shock, but the focus is firmly on a U.S. Federal Reserve
meeting later on Wednesday that is widely expected to deliver an
interest rate cut.
Sterling traded near a six-week high versus the dollar as
some speculators reduced excessive bets on a decline in the
pound, but sentiment remained weak due to uncertainty over how
the UK will exit the European Union.
Major currencies are likely to trade in narrow ranges before
the Fed's meeting. Fed Reserve Chairman Jerome Powell has
clearly broadcast his intention to cut rates, so some analysts
warn that the dollar could actually bounce if the Fed eases
policy as expected.
"Speculators are already excessively short in the dollar,"
said Yukio Ishizuki, foreign exchange strategist at Daiwa
Securities in Tokyo.
"If there are no surprises from the Fed, the speculators
will have to give up their dollar shorts. The biggest reaction
would be in dollar/yen, because you can't really buy the pound
or the euro at the moment."
The dollar traded at 108.10 yen JPY=EBS on Wednesday,
close to a seven-week high of 108.37 yen.
The British pound GBP=D3 was quoted at $1.2497, holding
onto a 0.6% gain from Tuesday, when it briefly touched the
highest since July 19.
Oil prices tumbled around 6% on Tuesday after Saudi Arabia's
energy minister said the kingdom has tapped inventories to
restore oil supplies to where they stood before drone attacks
over the weekend shut around 5% of global oil output.
Economists and analysts widely expect the Fed to cut its
benchmark rate for the second time this year by 25 basis points
to 1.75%-2.00% at a meeting ending Wednesday to counter risks
posed by the U.S.-China trade war. However, an anomaly has emerged in futures pricing.
Short-term rates spiked overnight, which led the Fed to
inject $53.15 billion into the financial system with a money
market operation it has not used in more than a decade.
The chaotic moves in money markets and late-day swings in
U.S. federal funds futures mean the CME's FEDWATCH tool shows
about a 51% chance that the Fed will cut rates by 25 basis
points on Wednesday. Elsewhere in the currency market, the euro stood at $1.1072
EUR=EBS , flat so far in Asia
The Australian dollar fetched $0.68605 AUD=D3 , down 0.07%
in early trade.
The dollar index .DXY measuring the greenback against a
basket of six major currencies fell 0.02% to 98.242.

(Editing by Jacqueline Wong)