* Many expect Fed to announce bond buying of $45 bln a month
* Euro helped by surprise strength in German sentiment
* Aussie dollar hits three-month highs vs USD
* Yen under pressure on BOJ expectations ahead of election
TOKYO, Dec 12 The dollar hovered near multi-month lows against higher-yielding currencies on Wednesday as markets bet the U.S. Federal Reserve would announce more stimulus later in the day.
The euro was also buoyed following surprise strength in German economic sentiment, which contrasted with recent signs that concerns over the "fiscal cliff" are hurting U.S. economic confidence.
"The Fed tends to take preventative steps on the economy, considering the way the Fed started QE3. Given concerns about the fiscal cliff, I think the Fed will do what's been discussed in markets," said Hideki Amikura, forex manager at Nomura Trust Bank.
"In that case, the euro/dollar should rise further," he added.
The dollar index stood at 80.10, barely changed from late U.S. levels but down 0.5 percent so far this week. For now, it is holding above a 61.8 percent retracement of its rally last week at 80.00 but a fall below that level could open the way for a test of six-week low of 79.568 hit a week ago.
The Fed, which ends a two-day policy meeting later on Wednesday, is expected to replace its expiring 'Operation Twist' programme with a fresh round of outright bond purchases.
Many economists believe the U.S. central bank will announce monthly debt purchases of $45 billion, which will come on top of mortgage bond buying of $40 billion a month the bank started in September.
"Although the view that the Fed will shift to outright Treasury purchases is now very widely shared by market participants, we do not believe it has been fully reflected into markets or in positioning," said Vassili Serebriakov, a strategist at BNP Paribas.
The euro pulled away further from a two-week low around $1.2876 plumbed Friday and last stood at $1.3001, keeping gains after Tuesday's surprisingly strong Germany's ZEW economic sentiment index.
Morale among German analysts and investors improved sharply in December, fanning hopes that Europe's largest economy may avoid recession this winter despite all the grim news out of other parts of the region.
That contrasted with a fall in U.S. consumer confidence, which data showed last Friday posted its largest drop since March 2011 in November on worries about the fiscal crisis.
Many investors are expecting U.S. political leaders to eventually reach a deal to reduce the threat of automatic and aggressive fiscal tightening but there has been little concrete signs of progress in negotiations.
HUNGRY FOR YIELDS
The spectre of further easing in the United States is putting a fresh focus on higher-yielding currencies as the world's four most liquid currencies -- the dollar, the euro, the yen and the pound -- all have near zero interest rates now.
The Australian dollar hit a three-month high of $1.0541 and last stood at $1.0533, near late U.S. levels.
"The Aussie remains one of a few currencies with yields therefore investors have no choice but to buy," said a trader at a European bank.
Still, on charts the Aussie is near the top end of a contracting triangle dating back to July last year, which comes around $1.0570 this week and could be a strong resistance level.
The Canadian dollar was near a seven-week high of C$0.9858 per U.S. dollar hit on Tuesday while the New Zealand dollar stood near a nine-month peak of $0.8398.
The Australian dollar hit an 8-1/2-month high of 87.01 yen as the yen has been hurt by speculation that the Bank of Japan will take more aggressive easing steps after a likely victory of the Liberal Democratic Party in the country's election on Sunday.
LDP leader Shinzo Abe has called for unlimited easing. The Bank of Japan is also expected to expand its own asset-buying and lending programme at next week's policy meeting.
Against the U.S. dollar, the yen weakened about 0.2 percent to 82.65 yen, not far from 7 1/2-month low of 82.84 per dollar hit almost three weeks ago.
There was limited reaction in the yen after North Korea launched a rocket, which critics say is a disguised ballistic missile test, as the news had little immediate implications for the global economy.