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LONDON, Mar 29 (Reuters) The dollar steadied on Wednesday, holding on to most of the broad gains made the previous day after the U.S.

Federal Reserve raised interest rates and signalled another increase was likely.

But its progress was capped by growing expectations that interest rates in the euro zone are likely to rise as soon as May -- a move to which money markets are now giving a probability of near to 100 per cent.

The Fed boosted rates by a quarter of a percentage point to 4.75 per cent as expected and said in a statement that more policy tightening ''may be needed'', leading many traders to conclude the central bank will raise rates again in May.

Such a hike would likely solidify for now the dollar's yield advantage over other major currencies. Euro zone rates, at 2.50 per cent, are not expected to match those in the United States for now, despite forecast tightening.

Japan's overnight call rate is still near zero, whilst UK rates -- at 4.50 per cent -- have now been overtaken by fed funds for the first time since 2000.

''The FOMC statement, that is clearly what's still driving the market,'' said Michael Klawitter, senior currency strategist at WestLB in Duesseldorf. ''With the interest rates spread once again widening in favour of the U.S. dollar, nominal interest rate differentials are driving euro/dollar.'' With a Fed hike to 5 per cent now seen as near-certain, the market is likely to focus on policymaker comments and data, looking for clues on whether tightening is likely beyond that.

New York Fed President Timothy Geithner, Richmond Fed President Jeffrey Lacker and Fed Board Governor Susan Schmidt-Bies are all due to speak later on Wednesday.

At 1223 GMT, the euro was fractionally higher on the day at $1.2010, but off 6-day highs of $1.2109 hit in the previous session, ahead of the Fed decision and following a surprisingly strong Ifo survey of German business sentiment and euro zone M3 money supply data.

ECB EXPECTATIONS On Wednesday, ECB Executive Board members Jose Manuel Gonzalez-Paramo said there were risks to price stability.

Concerns about inflation are a key reason behind ECB rate hikes.

Policymaker comments and Tuesday's strong data have fuelled anticipation of a hike from 2.50 per cent and boosted expectations of further tightening later in the year.

''For the euro area now we are looking for a 25 basis point hike in May and in general for a more aggressive profile of interest rate hikes than is currently priced in by the markets,'' said for Adarsh Sinha, FX strategist at Barclays Capital.

The dollar was at 117.83 yen, a touch weaker from late U.S.

trade on Tuesday. The dollar rose 1 per cent against the yen on Tuesday, its biggest gain this year.

The U.S. currency also extended gains versus the Canadian dollar, sending the latter to a 10-week low of C$1.1747.

PEAK AT 5 PER CENT? The communique released after the Fed meeting, the first with Ben Bernanke as chairman, said U.S. economic growth is likely to moderate to a more sustainable pace.

Some analysts took that to suggest that the central bank does not feel pressed to keep raising rates repeatedly, after 15 straight hikes since mid-2004.

A Reuters poll of 20 Wall Street economists taken after the Fed's latest decision showed 19 expect rates to rise to 5 per cent in May, with most seeing then that level as a peak.

With both the Bank of Japan and the ECB seen raising rates later this year, a near-term end to the Fed's tightening cycle would not be positive for the dollar, traders said.

Elsewhere, the Swiss franc ticked lower against the euro towards recent two-year lows after the Swiss KOF indicator came in at 1.30 in March, below the forecast 1.35.

However analysts said the index was at a sufficiently high level to still support expectations for gradual monetary policy tightening by the Swiss National Bank.

REUTERS SD HT2030