* Dollar underpinned by higher yields ahead of Fed meeting
* 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 edged down in Asian trade on Wednesday but was underpinned by lofty U.S. yields after upbeat consumer spending data kept alive expectations that the U.S. Federal Reserve would raise interest rates.
"The dollar/yen sold off a bit in Tokyo, but some viewed it as a good chance to buy on dips," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
Recent currency ranges were likely to hold for now, he said, with investors waiting for the outcome of the Fed's two-day meeting beginning later in the session.
The Commerce Department said on Tuesday that retail sales excluding automobiles, gasoline, building materials and food services increased 0.4 percent in August after an upwardly revised 0.6 percent rise in July. That data offset separate figures that suggested manufacturing activity weakened.
A rise in German Bund yields also bolstered those 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.
The bullish sales data prompted some investors to slightly increase their bets that the Fed would raise interest rates for the first time since June, 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 (NASDAQ:CME) FedWatch program.
Still, many are betting that recent volatility in global markets and increasing evidence of slowing growth in China will prompt the Fed to hold fire this month.
Inflation has been undershooting the Fed's forecasts for the past three years, and wage growth has lagged improvements in the U.S. labour market, creating a conundrum for policymakers under Chair Janet Yellen.
"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 had 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.
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 120.21 yen JPY= , down about 0.2 percent from late U.S. trade but holding above Tuesday's low of 119.40.
The euro was buying 135.73 yen, nearly flat from U.S. levels and above the previous session's low of 135.00. The euro also bought $1.1293 EUR= , up 0.2 percent and moving back toward Monday's three-week high of $1.1373.
The dollar index .DXY , which tracks the greenback against a basket of six major rivals, was down about 0.2 percent at 95.443, well above a three-week low of 94.913 plumbed on Monday.