Asian stocks edged up to a three-week high on Thursday while the dollar drifted lower against other currencies as investors consolidated positions ahead of a nail-biting US Federal Reserve policy decision.

The US Fed is considering raising US interest rates for the first time since 2006, although economists are split in their expectations. The Fed's decision is due at 1800 GMT.

While financial markets have expected a Fed rate increase for most of this year as the US economy has shown signs of picking up, those expectations have faded in recent weeks thanks to global financial market turmoil, especially in China.

Even if the Fed were to raise rates, many market players expect officials to signal a dovish stance, rather than herald a series of interest rate increases.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.8 per cent to its highest level in three weeks, while Japan's Nikkei average rose 0.7 per cent. Australian shares rose 1 per cent.

"We think it is going to be a very close call," said Stephen Chiu, a strategist at Mitsubishi UFJ Financial Group in Hong Kong. "Communicating the future path of interest rates is very important and the Fed would be careful not to signal any excessive tightening given global markets are still very vulnerable."

A narrow majority of economists in a Reuters poll expect the US Federal Reserve to hold fire. Just last week, they had narrowly predicted a rate rise.

Perhaps more worryingly for Asian markets in coming months, earnings growth expectations have been steadily revised lower signalling a bleak economic outlook whether or not the US raises interest rates.

Oil prices held on to Wednesday's sharp gains that followed news of a large US crude drawdown at the key US delivery point of Cushing, Oklahoma. The data eased worries about over supply and helped to boost battered energy stock prices.

That in turn supported Wall Street shares. The S&P 500 index rose 0.9 per cent to 1,995.31, its highest close in almost a month. It has pared back about half of the losses made in a fall from July to late August.

Precious metal prices jumped as some market players interpreted an unexpected dip in US consumer prices to mean a smaller chance of an immediate rate hike.

Gold prices rose 1.3 per cent on Wednesday to $1,119.50 per ounce. Silver jumped 3.9 per cent to $14.96 per ounce, its highest level in more than three weeks.

The dollar edged lower after the consumer prices figures, with the dollar's index against a basket of six major currencies slipping to 95.323 from this week's high of 95.845.

"We believe that the Fed will refrain from raising rates today. But at the same time, it will indicate that it is highly likely to raise rates by the end of the year," said Tomoaki Shishido, fixed income analyst at Nomura Securities.

US money market futures held steady, pricing in about a one-in-four chance of a Fed rate rise on Thursday.

On the other hand, the yield on the US two-year note rose to a 4 1/2-year high of 0.819 per cent as investors expect the Fed to raise interest rates soon, even if it does not do so later on Thursday.

The rise in US Treasury yields likely also reflected selling by China, which has intervened in currency markets to support the yuan, market players said.

China's holding of US Treasuries dropped to $1.241 trillion in July from $1.271 in June, data showed on Wednesday. – Reuters