FOREX- Dollar bounce stalls as Alabama outcome adds uncertainty

* Fed set to raise interest rates for 3rd time this year

* Graphic: World FX rates in 2017 By Saikat Chatterjee

LONDON, Dec 13 (Reuters) - A two-week rally in the dollar stalled on Wednesday after a Democrat won a bitter fight for a U.S. Senate seat in deeply conservative Alabama, injecting fresh uncertainty about the outlook for the greenback in the coming months.

Even as the U.S. Federal Reserve prepares to raise interest rates for the third time this year at the end of a two-day policy meeting in the day, traders are a bit more sceptical that policymakers will flag more rate hikes next year than the current two increases currently priced into markets.

"Expectations from the U.S. are very limited today in terms of forward guidance despite some likely optimistic assessments about the economic outlook, so the Fed decision may prove to be less supportive for the dollar," said Valentin Marinov, head of G10 currency research at Credit Agricole in London.

The dollar was flat against a trade-weighted basket of currencies at 94.06 on Wednesday after rallying more than 1.5 percent so far this month. Despite the bounce, the dollar is down nearly 8 percent so far this year.

Democrat Doug Jones' win deals a blow to President Donald Trump as the reduced Senate majority could make it harder for him to push through tax cut plans and other economic agenda.

"I am surprised the Alabama outcome is not having a bigger impact on the dollar," said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

Against the yen, the dollar slipped 0.2 percent to 113.35 yen , after rising to a four-week high of 113.75 yen on Tuesday.

The euro was flat at $1.1745, after slipping to a three week low of $1.17175 the previous day.

Investors are focusing more on the Fed's projection on the pace of its rate hikes next year and policymakers' views on the outlook for inflation.

The Fed will announce its decision on rates at 1900 GMT Wednesday followed by a statement. Chair Janet Yellen will hold a news conference at 1930 GMT.

Elsewhere, the British pound hovered at $1.3320 , near two-week lows of $1.3303 touched on Tuesday, although the currency was briefly propped up by data showing British inflation unexpectedly hit a near six-year high in November.

Consumer price inflation rose to an annual rate of 3.1 percent in November, above economists' average expectations of 3.0 percent rise.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano in TOKYO; Editing by Richard Balmforth)

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