FOREX-Euro rises on strong ZEW, dollar dips before Fed
* Euro gains as German ZEW at highest since April 2010
* But rise limited as focus centres on U.S. Fed meeting
* Dollar dips, seen in tight range before decision on Weds
* Markets expect modest tapering of stimulus by Fed
By Jessica Mortimer
LONDON, Sept 17 (Reuters) - The euro rose against the dollar on Tuesday after a German sentiment survey rose more than forecast, but gains were limited before a Federal Reserve meeting expected to result in a cut in stimulus.
The euro was up 0.2 percent at $1.3360, nearing a peak of $1.3385 hit on Monday, its highest since late August.
The German ZEW think tank's economic sentiment poll rose to 49.6 from 42.0 in August to reach its highest level since April 2010, suggesting a growing sense of financial wellbeing that could support Chancellor Angela Merkel's chances of winning a third term in Sunday's election.
The euro's gains were limited, however, with traders reluctant to make fresh bets before the U.S. two-day policy meeting, which begins later on Tuesday. A recent Reuters poll showed economists expect the Fed to reduce monthly asset purchases by a relatively modest $10 billion.
"There was a fairly large improvement in ZEW ... The market did react but only for a short time," said Richard Falkenhall, currency strategist at SEB. "I'd be surprised if we saw any large moves before the Fed."
But he added: "When it comes to the euro and the euro zone it is more important what happens in the German election."
The dollar was down 0.15 percent versus a basket of currencies at 81.172, though it held above a four-week low of 80.968 set on Monday.
Niels Christensen, currency strategist at Nordea in Copenhagen said if the Fed cuts quantitative easing by the forecast $10 billion this should be enough to push U.S. bond yields and the dollar slightly higher.
The dollar edged up 0.1 percent to 99.14 yen but was expected to stay stuck below chart resistance at 100 yen.
Analysts say rate hike expectations hold the key for the dollar because of their impact on short-term U.S. bond yields.
The dollar retreated on Monday after Lawrence Summers' withdrawal from the race to lead the Federal Reserve reduced the chances of a rapid cut in monetary stimulus.
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