By Marc Jones
LONDON (Reuters) - The dollar and U.S. Treasury yields crept higher along with world shares on Wednesday, as markets braced for what was expected to be a very close call on the future of the Federal Reserve's massive stimulus program.
The debate over when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months due to fears that it may trigger a turbulent reaction from investors who have become all too used to the support.
A majority of economists polled by Reuters expect the Fed to wait until March before it starts the process, but recent encouraging data from the U.S. and other parts of the world have raised the odds of a move in January, if not now.
Wall Street was seen opening up around 0.3 percent though most investors were expected to be keeping to the sidelines.
"Probably the strongest encouragement for tapering to begin this evening is the stability in financial markets," said Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ.
"Our hunch is that a taper announcement may well encourage a year-end rally in global equity markets as an element of policy uncertainty is cleared," he said, adding the dollar should also do well against the yen.
The predictions already appeared to be coming true as the final countdown began.
European shares on the bluechip FTSEurofirst 300 <.FTEU3>, rose 0.9 percent, helped by another dash of morale-boosting German sentiment data, while the dollar was firmer against both the yen and the euro.
The greenback wasn't having things all its own way though.
News that UK unemployment hit its lowest level in 4-1/2 years sent the pound back towards its recent highs as it reignited talk that the Bank of England will not be able to hold off from raising interest rates next year.
It was last at $1.6350 and buying 1.18 euros. The rise came despite a warning in BoE meeting minutes that a stronger sterling could jeopardize the UK's recovery.
Ten-year U.S. government bond yields, the benchmark for global borrowing costs and one of the most sensitive indicators to the Fed's stimulus plans, were edging higher at 2.85 percent as U.S. trading began.
The Federal Open Market Committee, the Fed's policy-setting group, will release a policy statement at 2.00 p.m. EST, followed by a press conference with Fed Chairman Ben Bernanke a half hour later.
The central bank's stimulus campaign has been a major driver for global risk assets in recent years and exactly how markets will cope as the taps are turned off remains the trillion dollar question for investors.
Emerging markets took a beating back in August when the Fed looked to have been edging towards pulling the trigger.
As Wednesday's decision loomed, Indonesia's rupiah hit a five-year low of 12,150 per dollar, while the Philippine peso dropped 0.3 percent to 44.13 to the dollar and the Thai baht eased 0.5 percent to 32.25, a one-week low.
"We are bearish on those currencies held back by weak or deteriorating current account positions, inflation challenges and, in some cases, poor internal debt dynamics," Morgan Stanley analysts wrote in a report.
Euro zone-focused investors were also digging through details that emerged overnight on the bloc's long-awaited plans for repairing or shutting down troubled banks.
Under the agreement, banks will provide the cash to pay for the closure of failed lenders, giving roughly 55 billion euros over 10 years accumulated in a Single Resolution Fund.
Until then, however, if there is not enough money from the fees, governments will be able to impose more levies on banks. If that does not suffice, they would help with public money.
Philippe Gudin, head of European economics research at Barclays said one of the other major faults was that national governments would retain control over bank closures.
"I think it is very disappointing. The power is still in the hands of the governments and not an independent central authority," he said.
Along with the stronger dollar, it helped take the wind out of the euro's sails as it sagged back to $1.3750.
Ukraine's hryvnia currency and its bonds soared a day after the country agreed a bailout from Russia.
Turkish stocks fell to their lowest level in more than three months though, against the backdrop of a widespread corruption probe involving government ministers and top businessmen.
Among commodities, U.S. crude prices were steady at $97.25 a barrel, recovering from the previous session's 0.3 percent decline as Brent dipped to $108.41.
Gold rose 0.3 percent to around $1,234 an ounce, having fallen 0.8 percent overnight. The precious metal has fallen more than 26 percent in 2013, heading for its worst year since 1981.
(Additional reporting by Dominic Lau in Tokyo; Editing by Susan Fenton)