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Traders still debating odds of 50 bps or 25 bps Fed cut

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Robust U.S. retail sales briefly tipped scale toward 25

bps

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Dollar drops vs yen, but 2-year Treasury yield tick up

(Updates prices as of 0841 GMT)

By Kevin Buckland and Sruthi Shankar

Sept 18 (Reuters) - The dollar slipped on Wednesday

while Treasury yields edged higher and global stocks steadied as

traders weighed the odds of a super-sized Federal Reserve

interest rate cut later in the day.

The U.S. currency dropped 0.5% against the yen to

141.68, handing back about half of its gains from Tuesday, when

unexpectedly robust U.S. retail sales data was taken as

weakening the case for aggressive Fed easing.

U.S. bond yields however ticked higher. The 2-year Treasury

yield, the most sensitive to short-term rate

expectations, edged up 2.5 basis points to 3.617%.

The chances of the Fed kicking off its easing cycle with a

super-sized cut of 50 basis points (bps) were revived earlier

this week, after media reports raised the prospect of more

aggressive action.

Financial markets are fully pricing in a 25 bps rate cut,

while the odds of a 50 bps cut stood at 61% by Wednesday,

according to LSEG data, up from as little as 14% a week ago.

"We love this debate - everyone's very focussed on 50 or 25

but what is important is that they communicate to the market

that they intend to go neutral by next summer," said Samy Chaar,

chief economist at Lombard Odier.

"The worst that you can get is they go 25 and pretend that

everything is normal and that monetary policy still needs to be

restrictive."

European stocks slipped 0.3%, with technology and

healthcare shares among the biggest laggards.

The MSCI's index of world stocks was flat

after having touched a two-week high a day earlier and just

below an all-time high.

Japan's Nikkei stock index climbed as much as 1.3%

early on in reaction to overnight weakness in the yen, but pared

those gains to 0.5% as the currency rebounded.

BULL RUN TO GO ON?

Wall Street finished nearly unchanged on Tuesday, failing to

sustain early momentum that pushed the S&P 500 and Dow Jones to

record intraday highs. S&P 500 futures pointed a flat

open later on Wednesday.

The euro rose 0.2% to $1.1132. Sterling

edged up 0.35% to $1.3208 after data showed British inflation

held steady in August, but picked up in the services sector,

adding to bets in financial markets that the Bank of England

will keep interest rates on hold on Thursday.

Traders are pricing in just a 26% probability of a 25-bp cut

from the BoE on Thursday.

"Today's inflation data does not warrant any justification

for a surprise cut tomorrow," said Derek Halpenny, head of

research global markets EMEA at MUFG. "A larger 50bp rate cut

from the Fed tonight would likely lead to increased speculation

of a rate cut from the BoE."

Meanwhile, gold struggled to find its feet on

Wednesday, trading flat at $2,569 per ounce after retreating

from record highs earlier this week.

Crude oil also pulled back after gaining about $1 a barrel

on Wednesday as tensions escalated in the Middle East.

U.S. crude futures declined 1.4% to $70.22, and Brent

crude futures lost 1.2% to trade at $73.83.