Expectations of a halt in the Federal Reserve's two-year campaign of interest rate rises kept the dollar near two-month lows on Tuesday, while auto firms led stocks higher in Asia and Europe.

Government bond traders were also in thrall to the Fed's decision, with markets pricing in only a small chance of an 18th straight rate hike after weaker-than-expected U.S. growth and employment data last week.

The Fed decision is due at 1815 GMT.

If they hike it will be a surprise. But it is not going to benefit (the dollar) either way. It's definitely going to be the end of the tightening cycle, said Sonja Marten, currency strategist at Dresdner Kleinwort.

Ultimately the market is starting to focus on recession. I think they will end up cutting (rates) ... I don't see lasting dollar appreciation coming today.

At 0935 GMT, the dollar stood at $1.2841 per euro, slightly down on the day, having hit a two-month low of $1.2909 on Friday.

It was also slightly weaker against the yen at 115.10 yen.

BONDS STEADY

U.S. Treasuries and euro zone bonds were also little moved, but traders were less certain that the U.S. rates are on hold indefinitely.

There is no market consensus about whether the Fed would stop, rather than pause, raising rates, meaning there is still the possibility of future rate rises, said a senior trader at a Japanese bank.

Yields on longer maturities have excessively factored in the possibility of a rate cut, and there is the risk the sector could face selling, he said.

The U.S. jobs market has softened, but manufacturing growth has remained robust and the threat to inflation from high oil prices feeding through to other costs is another problem for the Federal Reserve and other central banks.

Crude prices held near record peaks as oil major BP continued its shut down of Alaska's Prudhoe Bay oilfield, the biggest in the United States, possibly for months.

London Brent crude dipped to $78 a barrel, from a record high of $78.64 on Monday, while U.S. light crude was off 20 cents to $76.79.

Energy markets were also looking to the Middle East, where there were fresh diplomatic negotiations aimed at ending the four-week-old war that has killed more than 1,000 people.

Air strikes and ground fighting continued in south Lebanon as the U.N. Security Council worked to bring about a ceasefire.

STOCKS FIRM

Despite the higher oil prices, auto companies were among the best performers in Asia and Europe, boosted by a report of an expanded production deal between Daihatsu Motor Co. and Toyota Motor Corp. and solid earnings in the sector.

Japan's Nikkei average rose 2.05 percent to close at 15,464.7 points, buoyed by gains for Toyota, Daihatsu and other auto makers after recent losses.

In Europe, the DJ Stoxx auto sector rose 1 percent, helping the broad Stoxx 600 Index gain 0.3 percent to 325.3 points.

Finnish tyre maker Nokian Renkaat soared 11 percent after its second-quarter sales and operating profit topped forecasts.

But across the market, volumes remained light as the summer holidays in Europe and nerves ahead of the U.S. interest rate decision kept investors sidelined.

Expectations are for the Fed to turn more dovish so any surprises here - or even a suggestion that any pause may just last one meeting - would likely put equities across the board under pressure again, said Ian Griffiths, a trader at CMC Markets.

Toyota Inflation