* Dollar weakness weighs on oil, commodities * API says crude stocks rose, distillates fell sharply * Coming up: EIA oil data 10:30 a.m. EST Wednesday NEW YORK, Jan 26 (Reuters) - U.S. crude oil futures prices rose on Wednesday as the dollar fell against a basket of currencies and as investors awaited the government's weekly inventory data and results of the Federal Reserve's two-day meeting. Investors were expecting the Fed's statement to point to an improving economic recovery and no change to the central bank's bond-buying policy. Crude's price rise came ahead of the government's weekly oil inventory report later on Wednesday and despite an industry report late on Tuesday showing U.S. crude oil inventories rose more than expected last week, up by 2.1 million barrels as imports jumped 1 million bpd. [API/S] The American Petroleum Industry's report also showed distillate inventories fell 5 million barrels, including a 2.4 million barrel slide in heating oil stocks alone, reflecting strong heating fuel demand. Gasoline stocks rose, the API said, but only 1.7 million barrels, less than expected. A Reuters analyst survey ahead of the weekly reports yielded a forecast for crude oil inventories to be up 1.2 million barrels. Distillate stocks were expected to be down, but only by 300,000 barrels, with gasoline stocks seen up 2.1 million barrels. [EIA/S] FUNDAMENTALS * On the New York Mercantile Exchange, March crude CLH1 res 40 cents, or 0.4 percent, to $86.59 a barrel at 8:33 a.m. EST (1333 GMT), trading from $86.19 to $86.99. * The U.S. Federal Reserve'S two-day meeting concludes on Wednesday and is expected to end with a nod to an improved economic outlook but no change in course on its $600 billion bond-buying plan. [ID:nFEDAHEAD] * Hovensa LLC said it planned to shut down some process units on the west side at its refinery in St. Croix, Virgin Islands. Hovensa said the shutdowns would reduce the refinery's crude distillation capacity from 500,000 barrels per day to 350,000 bpd, with no effect on capacity of its coker or fluid catalytic cracking unit. [ID:nWNAB6937] MARKETS NEWS * The euro EUR= seesawed near unchanged after hitting a two-month high versus the dollar earlier ahead of the Federal Reserve's statement as investors await any indication about the Fed's concerns about inflation or an affirmation that it will stick with its stimulus policy. * The dollar index .DXY hit a 10-week low against a basket of currencies with the market looking for confirmation from the Federal Reserve later in the day that its focus remains on supporting growth. [USD/] * World stocks rose and the dollar declined after U.S. President Barack Obama in his State of the Union speech Tuesday night promised spending cuts, cementing expectations the Fed's policy would stay loose. [MKTS/GLOB] * Gold edged up on bargain buying. [GOL/] * Copper rallied as the dollar weakened against the euro but the approach of a holiday in top consumer China and expectations of tighter policy in the country checked investor enthusiasm. [MET/L] UPCOMING DATA/EVENTS * U.S. Commerce Department releases new home sales for December at 10 a.m. EST (1500 GMT). Economists in a Reuters survey forecast 300,000 annualized units following 290,000 in November. * The Federal Reserve's Federal Open Market Committee will release a statement outlining its views on the economy and monetary policy at around 2:15 p.m. (1915 GMT) on Wednesday. * The U.S. Energy Information Administration oil inventory report is due on Wednesday at 10:30 a.m. EST (1530 GMT). 8:33 LAST NET PCT LOW HIGH CURRENT DAY AGO CHNG CHNG VOL VOL CLc1 86.59 0.40 0.4% 86.19 86.99 35,625 356,085 CLc2 88.35 0.48 0.6% 87.91 88.74 16,639 141,631 LCOc1 96.65 1.41 1.5% 95.29 96.88 57,821 229,708 RBc1 2.3687 0.0260 1.1% 2.3486 2.3745 1,061 23,879 RBc2 2.3949 0.0243 1.0% 2.3741 2.4025 3,642 44,540 HOc1 2.6332 0.0390 1.6% 2.6051 2.6364 1,813 28,245 HOc2 2.6354 0.0388 1.5% 2.6050 2.6400 8,550 47,233 * NYMEX crude oil for March CLc1 rose 40 cents to $86.59 a barrel by 8:33 a.m. in volume of 35,684 lots. (Reporting by Robert Gibbons; Editing by John Picinich)

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