* Sharp rise in German sentiment data boosts euro
* Fed to kick off two-day policy meeting on Tuesday
* Italian political worries take a backseat for now
NEW YORK, Dec 11 (Reuters) - The euro rose across the board on Tuesday after forecast-beating German data lifted sentiment toward the currency while investors steered clear of the U.S. dollar before a Federal Reserve meeting on monetary policy.
Traders said the euro could make further gains, especially against the dollar, if the Fed signalled more aggressive quantitative easing in the near term.
Germany’s ZEW economic sentiment index jumped to 6.9 in December, far higher than the -12.0 forecast and the previous reading of -15.7.
“After a bullish ZEW survey, a healthy Spanish bond auction and expectations of a continued QE3, euro/dollar has gathered enough bullish momentum to take the rate near the 1.30 psychological resistance,” said Marc Principato, director of SMB Fore x Trading And Education in New York.
The euro was up 0.4 percent on the day at $1.2987, having risen from around $1.2960 before the German data was released and breaking chart resistance at $1.2973, the 38.2 percent retracement of a sharp fall between Dec. 5 and Dec. 7.
Traders cited offers above $1.3000 with near-term support at a two-week low of $1.2878 touched on Monday.
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 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. “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 0.3 percent up on the day at 1.2109 Swiss francs, after UBS mirrored Credit Suisse and levied a charge on some Swiss franc cash deposits.
Investors were reluctant to buy the dollar before a two-day U.S. Federal Reserve policy meeting starting on Tuesday. The Fed is expected to replace its expiring “Operation Twist” programme 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.
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.
But the dollar edged up 0.1 percent to 82.41 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..