Loonie strengthens as markets await Fed

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart in early trade on Wednesday as global markets settled between hope and fear amid Greek debt developments and ahead of a Federal Reserve meeting.

World stocks and the euro held gains ahead of the conclusion of a two-day Fed meeting which may prepare markets for more U.S. monetary easing, having recovered somewhat from risk-averse trade on Tuesday linked to Greece's plans to hold a referendum on the European bailout package.

The Canadian dollar tumbled overnight to a low of C$1.0223 to the U.S. dollar, or 97.82 U.S. cents, but regained ground as investors took stock ahead of the Fed meeting.

Markets have settled since yesterday's Greece/China induced risk aversion flare up and focus now shifts to the FOMC statement at 2:15 p.m, John Curran, senior vice president at CanadianForex, a commercial foreign exchange dealing firm, said in a research note.

At 9:14 a.m. (1314 GMT), the Canadian dollar stood at C$1.0122 to the U.S. dollar, or 98.78 U.S. cents, up from Tuesday's North American session close at C$1.0188 versus the greenback, or 98.15 U.S. cents.

While market focus will be on the Fed statement and a later news conference by Chairman Ben Bernanke, analysts said it was likely too early for the Fed to indicate much in the way of further easing.

There is a limited amount they can do or say, to be honest, as clearly they still have the option of doing further quantitative easing but its very unlikely they'll want to use that yet, said Adam Cole, global head of FX strategy RBC Capital Markets in London.

In terms of actual firm policy changes, it is very difficult to see anything come out of it. So I suspect it is a bit of a sideshow to news out of Europe.

Curran said markets may be disappointed by the lack of fresh commitment from the Fed and turn risk-averse again, sinking equities late in the day.

It is most likely too early for the Fed to indicate additional asset purchases but markets are looking for some indication of this and tentatively adding risk today. Look for disappointment to lead to further risk aversion resulting in weaker equities and U.S. dollar values, he said.

With so much still up in the air, Cole said the Canadian dollar could trade in a broad range. It had likely already touched its weakest point overnight at C$1.0223, while parity would be a stretch on the upside, Cole said.

We're just thrashing around in this wide range.

Canadian government bond prices were down across the curve. The two-year bond fell 10 Canadian cents to yield 0.977 percent, while the 10-year bond dropped 32 Canadian cents to yield 2.196 percent.

(Reporting by Andrea Hopkins, Editing by Chizu Nomiyama)