MUMBAI, Sept 17 (Reuters) - The Indian rupee is poised to build on its recent recovery on Wednesday, supported by a drop in the dollar and U.S. Treasury yields, with the market focus firmly on the Federal Reserve's upcoming policy verdict.

The Fed is set to cut rates for the first time since December, with a 25-basis-point move fully priced in and a slim chance of a larger 50-basis-point reduction.

The 1-month non-deliverable forward indicated the rupee will open in the 87.86-87.90 range versus the U.S. dollar, compared with 88.0525 in the previous session.

The rupee, higher for three straight sessions, is likely looks set to extend its recovery for a fourth day on Wednesday. The currency hit an all-time low of 88.4550 last Friday.

The dollar's retreat and soft U.S. yields have forced traders to temper their confident near-term bearish calls on the rupee, with position unwinding adding to the currency's recovery.

"It would seem to me that a large part of the heavy, weak hands long dollar positions have already been pared. This means that a new move lower (on dollar/rupee) from here needs a real Fed surprise," a currency trader at a bank said.

He added that sustaining levels past 88.00 looked doubtful for the rupee and that 87.80 was a major support for the pair.

FED IN SPOTLIGHT

The Fed is poised to cut borrowing costs against the backdrop of a weakening U.S. labor market. The August jobs report disappointed, while there were sizeable downward revisions to job additions for the 12 months through March.

The Fed is expected to follow up on Wednesday's move with further cuts, with investors now pricing in a 125-150 basis point easing cycle, per ING Bank.

The pivot has led to a consensus that the dollar will weaken through the rest of the year, ING said.

The dollar index dropped 0.7% on Tue and is not too far away from its lowest level this year. The 2-year U.S. yield is down to 3.50%.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 88.01; onshore one-month forward premium at 13.5 paise

** Dollar index at 96.71

** Brent crude futures down 0.1% at $68.4 per barrel

** Ten-year U.S. note yield at 4.03%

** As per NSDL data, foreign investors sold a net $38.1mln worth of Indian shares on Sep. 15

** NSDL data shows foreign investors sold a net $48.9mln worth of Indian bonds on Sep. 15

Reporting by Nimesh Vora

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Rupee recovery to pick pace with Fed set to kick off rate cuts