* ZEW poll shows German economic sentiment jumps in Dec.
* Investors position for Fed policy decision due Wednesday
* Italian political worries take a back seat for now
* House Speaker Boehner hopeful on deficit reduction deal
By Julie Haviv
NEW YORK, Dec 11 The euro rose against the
dollar for a second straight day on Tuesday as surprisingly
strong German economic sentiment and optimism the United States
will avoid a fiscal crisis had investors broadly embracing
The start of a two-day Federal Reserve policy meeting
weighed on the dollar as well due to expectations that the Fed
will launch a new round of U.S. economic stimulus.
The euro, which has gained about 0.2 percent in December and
is up around 1.2 percent so far in the fourth quarter, could
rise further against the dollar if the Fed signals more bond
The single currency has notched a mere 0.5 percent gain so
far in 2012.
But the big driver of risk taking was Germany's ZEW economic
sentiment index. Morale among German analysts and investors
improved sharply in December, according to a monthly poll by the
ZEW think-tank, fanning hopes that Germany, Europe's largest
economy, will avoid recession this winter.
"The ZEW reading seemed to suggest that investors believed
that Germany would be able to avoid a recession and begin to
grow again as the year progressed," said Boris Schlossberg,
managing director of FX strategy at BK Asset Management in New
York. "The news helped to propel the euro/dollar to fresh
The euro last traded up 0.5 percent at $1.3004, not
far from the New York session peak of $1.3014.
Ulrich Leuchtmann, head of FX research at Commerzbank in
London, said the ZEW data would throw into question the European
Central Bank's grim economic forecasts for the region and
growing expectations of an interest rate cut early next year.
The Bundesbank has also slashed its growth forecast for Germany
in 2013 and warned that Germany could tip into recession.
On Monday, the euro had hit a two-week low against the
dollar on rate-cut expectations, a gloomy economic outlook and
political turmoil in Italy after Prime Minister Mario Monti said
over the weekend that he would resign early. But it recouped
lost ground after Monti said there was no danger of a vacuum
before the elections.
FISCAL CLIFF AND FED IN FOCUS
Bets that the White House and Congress will reach a deficit
reduction deal by the end of the year caused stocks to rally on
Tuesday but weighed on the dollar. An agreement is needed to
avoid massive tax increases and spending cuts beginning early
next year that economists say could send the United States back
The dollar's status as a safe-haven currency means it would
likely fare well if the United States fails to avoid the "fiscal
U.S. House of Representatives Speaker John Boehner, the top
Republican, offered no concrete signs of progress on Tuesday on
the fiscal cliff talks with the White House but said he remained
hopeful that both sides would reach an agreement by the
Investors were also reluctant to buy the dollar with the
start of the Fed's policy meeting. The Fed is expected to
replace its expiring "Operation Twist" program with another
Treasury bond-buying plan when it issues its policy statement on
"The expected supplementation of quantitative easing in the
expiration of Operation Twist is the main motivation of risk
strength and could prove to lift the markets heading into the
New Year particularly if the fiscal cliff is solved," said Neal
Gilbert, market strategist at GFT Forex in Grand Rapids,
Many economists believe the Fed will announce monthly bond
purchases of $45 billion, although some think it could be more.
The expectations of more Fed easing pushed the Canadian
dollar higher, with the U.S. dollar falling to a two-month low
, while the New Zealand dollar hit a nine-month high
. The New Zealand dollar also rose to a 2-1/2-year high
against the yen.
Against the yen, the dollar was last up 0.2 percent at 82.42
yen, according to Reuters data, on growing expectations
an election in Japan on Sunday could result in pressure for more
stimulus from the Bank of Japan.
Dollar/yen price movement remains constricted given that the
tight range from Nov. 22 has narrowed further over the past four
sessions, according Eric Theoret, currency strategist at
Scotiabank in Toronto.
"Prior levels of support for dollar/yen that had been just
below 81.80 have risen above 82, while resistance has remained
solid above 82.80," he said.
"Any potential for yen strength in reaction to a
dollar-negative Fed decision would be mitigated by near-term
expectations of BoJ policy," he said.