FOREX-Euro climbs before German ZEW survey, yen sags
* Euro could extend gains if sentiment survey beats expectations
* Dollar index higher before U.S. retail sales
* Yen down on Nikkei report that corporate tax cut maybe considered
By Anirban Nag
LONDON, Aug 13 (Reuters) - The euro inched up against the dollar and rose more sharply against the yen on Tuesday as investors anticipated a strong reading from Germany's ZEW sentiment survey, fanning optimism that the euro zone economy is picking up.
The yen sagged on a report in business daily Nikkei, which said Japanese Prime Minister Shinzo Abe is considering a corporate tax cut as a way to offset the potential economic drag of a planned two-stage hike in sales tax.
Investors who have been betting Abe will succeed in pulling Japan out of deflation have been hoping for more steps to boost the economy on top of already aggressive fiscal and monetary policies.
The euro was up 0.75 percent against the yen at 129.81 yen, while against the dollar it was up 0.1 percent at $1.3310.
The German ZEW investor sentiment index, due at 0900 GMT, is forecast to show economic conditions improved in August from July.
The euro has drawn some support from signs of stabilisation in the euro zone economy in recent weeks with yield differentials between U.S. Treasuries and German bunds narrowing for much of this month.
"We are expecting a strong ZEW number and that should be supporting the euro," said Alvin Tan, currency strategist at Societe Generale. "Our value models suggests the euro could probably push up to $1.34 but unlikely to go beyond that."
Euro zone GDP data due on Wednesday is expected to show the region exited recession in the second quarter.
The dollar will be tested by Tuesday's U.S. retail sales reading. Economists polled by Reuters forecast sales likely grew 0.3 percent in July after a 0.4 percent increase in June.
Strong U.S. data will encourage the Federal Reserve to trim its monthly purchase of about $85 billion in bonds sooner rather than later, giving the dollar a boost.
The dollar was up 0.7 percent against the yen at 97.65 yen while the dollar index inched up 0.15 percent to 81.461 . It hit a seven-week low of 80.868 last Thursday.
It also rebounded from a seven-week low of 95.81 yen touched last Thursday with traders attributing much of the move to the Nikkei report.
"There have been concerns that Abe may make changes to the planned tax hike, backpedaling on reforms. But if you believe today's media report, Abe is heading for a right direction," said Yunosuke Ikeda, senior FX strategist at Nomura Securities.
The tax cut report boosted Japanese shares and provided further support for dollar/yen, which has had strong a correlation with Japanese equities in recent months.