* Euro rises back above $1.13 as market awaits Fed decision
* Any dollar downside on policy hold may prove limited
* Yen holds up in Asian time, dips in Europe
By Patrick Graham
LONDON, Sept 17 (Reuters) - The euro crept back above $1.13 on Thursday ahead of the most keenly watched policy decision in years by the Federal Reserve which is, on balance, expected to hold off from a rise in U.S. interest rates.
Traders and analysts are divided on the likely impact of a variety of combinations of tones and decisions by the world's most influential central bank.
However, in the absence of a rate rise, only an extremely dovish message seems to hold much danger for the dollar.
"If they do hold off, you are probably going to see some kind of (downward) reaction," said Ian Stannard, head of European FX Strategy at Morgan Stanley (NYSE:MS) in London.
"(But) we see any volatility around the FOMC as a buying opportunity on the dollar. Even if they don't go now, they are in the process of preparing the ground to do so. On that basis, any kind of dip in the dollar could prove short-lived."
Analysis by French bank BNP Paribas (PARIS:BNPP) shows that a steady erosion of bets for more appreciation since March has left positioning on the U.S. currency flat, meaning relatively few longer-term players will be forced to sell if the Fed does not deliver a rise.
Early attention in Europe focused on the Swiss National Bank, which made no changes to official interest rates that are already deep in negative territory.
There had been some rumours of another cut by the bank and the franc inched higher after the SNB's statement. UK retail sales may also have an impact on sterling after a bullish labour market report on Wednesday.
With the Fed firmly in focus, market participants took in their stride Standard and Poor's downgrade of Japan's credit rating by one notch to A+ late on Wednesday. The cut brings its rating in line with those of rivals Moody's Investors Service and Fitch Ratings.
Investors also shrugged off data on Thursday that showed Japan's exports slowed for a second straight month in August, heightening fears that China's slowdown was increasing dragging on the global economy and reinforcing expectations that policymakers eventually would be forced into more stimulus.
Some said there were indications that the yen may have suffered from a high demand for dollars in Japan compared to elsewhere, reflected in prices of cross currency basis swaps.
The dollar rose to 120.92 yen JPY= , up around a third of a percent from late U.S. trade. The euro gained 0.6 percent to 136.89 yen.
Richard Benson, co-head of portfolio investment at currency managers Millennium Global Investments, was also bullish on the dollar's prospects going in to the Fed meeting. He pointed to interest rate differentials, which at around 80 basis points between two-year German and U.S. government bonds are at their highest since 2007.
"It seems most likely that the Fed will not be more dovish on policy than what the market is pricing in and the potential for the dollar to gain some traction tonight is substantial," he said. "I would see it gaining into the end of the week." (Editing by Jon Boyle)