* U.S. Treasury yields up on sales data, rising Bund yields
* U.S. rate futures imply slightly higher chance of hike
By Lisa Twaronite
TOKYO, Sept 16 (Reuters) - The dollar firmed in Asian trade on Wednesday, buoyed by a rise in U.S. yields after upbeat consumer spending data kept alive hopes that the U.S. Federal Reserve would raise interest rates at its two-day meeting beginning later in the session.
The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services increased 0.4 percent in August after an upwardly revised 0.6 percent increase in July. That data offset separate figures that suggested manufacturing activity weakened. ID:nL1N11L0Q5
A rise in German Bund yields also bolstered yields on U.S. sovereign notes, with two-year Treasury yields US2YT=RR hitting their highest in over four years and long-dated yields touching their highest in nearly two months in thin trading volumes ahead of the Fed meeting. U/S
The bullish sales data prompted some investors to increase their bets that the Fed would raise interest rates for the first time since 2006. U.S. interest rates futures implied that the market placed a 27 percent chance of a hike on Thursday FFU5 , up from 23 percent late on Monday, according to CME Group's FedWatch program. ID:nL1N11L0T7
Still, many are betting that recently volatile global markets and increasing evidence of slowing growth in China will prompt the Fed to stay its easing hand this month.
Inflation has been falling short of the Fed's forecasts for the past three years, and wage growth has lagged improvements in the U.S. labour market, creating a policy conundrum for policymakers under Chair Janet Yellen. ID:nL1N11E27Z
"Our U.S. economists expect the Fed to remain on hold at its September meeting, deferring rate hikes while it assesses downside risks to the outlook after recent financial market stress," economists at Barclays (LONDON:BARC) said.
"We expect Fed Chair Yellen to emphasize data-dependence and that every meeting remains 'live,' but we believe concerns about external demand and inflation will delay hikes until March 2016," they said in a note to clients.
The dollar clawed back ground lost to the yen on Tuesday, after the Bank of Japan held policy steady at the end of its two-day meeting as many had expected. ID:nL4N11L18G
The BOJ also warned that slowing demand in emerging markets was taking a toll on Japan's exports and output, leaving open the possibility of further easing steps to support the economy.
The dollar was trading at 120.45 yen JPY= , steady from late U.S. trade and well above Tuesday's low of 119.40.
The euro was buying 135.76 yen EURJPY= , nearly flat from U.S. levels and above the previous session's low of 135.00. The euro also bought $1.1273 EUR= , down from Monday's three-week high of $1.1373.
The dollar index .DXY , which tracks the greenback against a basket of six major rivals, was steady from U.S. trade at 95.587, well above a three-week low of 94.913 plumbed on Monday.