* Sharp rise in German sentiment data boosts euro
* Investors position for Fed policy decision due Wednesday
* Italian political worries take a backseat for now
NEW YORK, Dec 11 (Reuters) - The euro rose for a second straight day against the dollar on Tuesday after forecast-beating German data lifted sentiment toward the currency while investors steered clear of the U.S. dollar ahead of a Federal Reserve decision on monetary policy.
Traders said the euro could make further gains, especially against the dollar, if the Fed signaled more aggressive quantitative easing in the near term.
But the big driver was Germany’s ZEW economic sentiment index jumping to 6.9 in December, far higher than the -12.0 forecast and the previous reading of -15.7.
“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 session highs.”
The euro was up 0.4 percent on the day at $1.2988 with a session peak in the New York session at $1.3010.
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 the country could tip into recession.
Rate cut expectations, a gloomy economic outlook and political turmoil in Italy combined to push the euro to a two-week low against the dollar on Monday. But it recouped lost ground after technocrat Prime Minister Mario Monti said there was no danger of a vacuum before the elections.
“The euro’s dip below $1.2900 proved to be short-lived,” said Vassili Serebriakov, strategist at BNP Paribas In London. “FX markets are showing some notable resilience following news of Monti’s imminent resignation.”
Monti said on Saturday he would resign early after former Prime Minister Silvio Berlusconi abruptly withdrew support for his technocrat government.
The euro was also up 0.4 percent on the day at 1.2122 Swiss francs, after UBS mirrored Credit Suisse and levied a charge on some Swiss franc cash deposits.
Investors were reluctant to buy the dollar with the start of a two-day U.S. Federal Reserve policy meeting on Tuesday. The Fed is expected to replace its expiring “Operation Twist” program with another Treasury bond-buying plan when it announces its decision on Wednesday.
“We anticipate the Fed will announce Treasury purchases and as that depresses yields it will have a negative impact on the dollar and that supports the euro,” said Jane Foley, senior currency strategist at Rabobank in London.
Many economists believe the Fed will announce monthly bond purchases of $45 billion, although some think it could be more.
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.
The dollar was last little changed at 82.36 yen, not far from an eight-month peak touched last month on growing expectations an election on Sunday could result in pressure for of more stimulus from the Bank of Japan.
A report showing the U.S. trade deficit widened in October as exports suffered the biggest drop in nearly four years had little impact on trading..