* Euro off lows despite uncertainty about Italy's politics
* Fed to kick off two-day policy meeting Tuesday
* Investors expect more stimulus from the Fed
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, Dec 11 The euro hovered above two-week lows on Tuesday as nerves calmed over Italy's latest political turmoil for now and as prospects of more stimulus from the Federal Reserve pinned down the dollar.
Expectations that the Fed will announce fresh easing steps on Wednesday also lifted high-yielding currencies against the dollar, boosting the Canadian dollar to a two-month high and the New Zealand dollar to a nine-month high.
The common currency stood at $1.2957, up 0.15 percent from late U.S. levels and above a low of around $1.2880 plumbed on Monday.
It has risen some 0.6 percent from Friday's two-week trough around $1.2876. Immediate resistance is seen at $1.2973, a level representing the 38.2 percent retracement of its Dec. 5-7 fall.
The euro found some support after Italian Prime Minister Mario Monti played down market fears over his decision to resign, saying there was no danger of a vacuum ahead of an election in the spring.
"The euro's dip below $1.2900 proved to be short-lived," said Vassili Serebriakov, strategist at BNP Paribas. "FX markets are showing some notable resilience following news of Monti's imminent resignation."
Monti's move came after former prime minister Silvio Berlusconi abruptly withdrew support for Monti's technocrat government, accusing Monti's reform and austerity steps of dragging Italy "to the brink of a precipice."
"There's no doubt Monti's resignation raised some concerns but it's not like Berlusconi has strong public support," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
Although Italian bond and shares were hit by the news, that did not lead to rise-averse sentiment in broader financial markets, partly on the view that debt buying programme by the European Central Bank could curb selling in Italian debt, should their yields keep rising.
Another factor keeping the euro off its lows was a reluctance by investors to aggressively buy the dollar, given expectations the Fed will replace its expiring 'Operation Twist' programme with another Treasury bond-buying plan at its two-day policy meeting starting later in the day.
Many economists believe the U.S. central bank will announce monthly bond purchases of $45 billion, although some think it could surprise with a bigger amount to press borrowing costs lower. Such an outcome could see the greenback come under further pressure.
The dollar index slipped 0.1 percent to 80.23, retreating from at two-week high of 80.658 set on Monday.
The dollar was buying 82.37 yen, still not far from an eight-month peak of 82.84 set last month, though the currency pair has been stuck in a narrow trading band for the past couple of weeks after a sharp gain in mid-November.
The yen has been under pressure from expectations that opposition leader Shinzo Abe, a front-runner to become prime minister after an election on Sunday, will push the central bank to take more aggressive easing steps.
Japanese media survey showed conservative Liberal Democratic Party (LDP) and its smaller ally are heading for a resounding victory, winning more than 300 seats in parliament's 480-member lower house.
If they win more than 320 seats, or two-thirds of the total, they can push their policy more smoothly because they can overturn votes in the upper house, where they do not have control.
"The dollar is consolidating after rapid rise, with people looking at the Fed and the U.S. fiscal cliff. But the dollar could jump further if the LDP and its ally gains more than two-thirds of seats," said a trader at a Japanese bank.
The prospect of fresh stimulus from the Fed and growing expectations the Bank of Japan could expand its asset-buying and lending programme at a meeting next week kept high-yielding currencies well bid, despite worries that bullish positions were already stretched.
The Canadian dollar edged up slightly to a two-month high of C$0.9862 to the U.S. dollar while the New Zealand dollar rose about 0.2 percent to a nine-month high of $0.8358.
The Aussie briefly dipped following a surprise plunge in Australia's business confidence but pared most losses to stand at $1.0482, not far from an 11-week high of $1.0515 set last week.