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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 yields tick up

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Most Asian stock indexes flat to lower amid uncertainty

(Updates prices as of 0517 GMT)

By Kevin Buckland

TOKYO, Sept 18 (Reuters) - The dollar ceded some of its

overnight gains on Wednesday while Asian stocks struggled as

traders weighed the odds of a super-sized Federal Reserve

interest rate cut later in the day.

The U.S. currency dropped back sharply against the yen,

handing back about half of its rally from Tuesday, when

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

weakening the case for aggressive Fed easing.

However, short-term U.S. bond yields ticked slightly higher.

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

super-sized cut of 50 basis points (bps) oscillated in Asia,

retreating to 63% early in the day from 67% around the same time

on Tuesday, before stabilising around 65%, according to LSEG

data.

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

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

those gains to just 0.23% as of 0526 GMT as the currency

rebounded.

China's blue chips slipped 0.18% after coming back

online following a holiday-extended weekend, and Taiwan

also returned from a day off to tumble 1%. Australia's benchmark

sagged 0.1%.

MSCI's broadest index of Asia-Pacific shares outside Japan

slid 0.27%.

Hong Kong and South Korea were among major markets closed

for holidays.

Wall Street finished nearly unchanged on Tuesday, failing to

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

intraday highs. S&P 500 futures pointed 0.06% higher on

Wednesday.

Pan-European STOXX 50 futures were weaker though,

down 0.19%.

"The (U.S.) price action conveys the significant inflection

point markets confront," said Kyle Rodda, senior financial

market analyst at Capital.com.

"If the Fed nails it at this meeting, the bull market could

charge on. If it doesn't, then it could signal a high water mark

in this cycle."

The dollar dropped 0.67% to 141.365 yen, although

that followed a 1.26% surge overnight.

The euro added 0.05% to $1.1119. Sterling

was steady at $1.3158.

At the same time, two-year U.S. Treasury yields

rose slightly to stand at 3.5962%, extending Tuesday's advance.

Commonwealth Bank of Australia analyst Kristina Clifton

expects a quarter-point rate reduction from the Fed, "because

history shows that the FOMC needs a good reason to start their

cutting cycle with more than a 25 bps cut."

But in the event of a more aggressive easing, the dollar's

reaction could vary dramatically, she said.

"A 50 bps cut that scares markets about U.S. economic

prospects could increase the USD because it is a safe haven

currency," Clifton said. "However, a 50 bps cut that eases

concerns about U.S. economic prospects could undermine the USD."

Meanwhile, gold struggled to find its feet on

Wednesday, slipping 0.1% to $2,567 per ounce after retreating

from an all-time high in the previous session.

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

on Wednesday amid escalating tensions around the Middle East.

Militant group Hezbollah vowed retaliation against Israel

after pagers detonated across Lebanon on Tuesday, killing at

least eight people and wounding nearly 3,000 others.

Meanwhile, the UN's Libya mission said factions did not

reach a final agreement in talks aimed at resolving the central

bank crisis, which has slashed oil output and exports.

U.S. crude futures declined 49 cents to $70.70 in the

latest session, and Brent crude futures lost 47 cents to

$73.23.