* Euro hits highest since early December 2011 vs dollar
* Yen gains versus dollar
* Fed expected to reaffirm QE expectations
By Wanfeng Zhou
NEW YORK, Jan 29 (Reuters) - The euro rose to a 14-month high against the dollar on Tuesday, lifted by an improving outlook for the euro zone and expectations the Federal Reserve will maintain its ultra-easy monetary policy for the foreseeable future.
Positive German economic data and signs European banks were on the mend, boosted hopes that the worst of the euro zone crisis was over, driving the euro up more than 2 percent so far this year.
Analysts said the euro’s rally has further to go. The dollar could struggle if the Fed, at the end of its two-day meeting on Wednesday, reinforces expectations for a continuation of quantitative easing beyond this year.
“Even though last month’s meeting’s minutes showed that Fed governors were divided on whether to continue the QE policy, it is the feeling of most traders that QE will not end during 2013 but rather will continue well beyond that date,” said Matthew Lifson, senior analyst and trader at Cambridge Mercantile Group in Princeton, New Jersey.
“If this is the case and the statement from the Fed backs this up, then the pressure on the U.S. dollar will increase.”
The euro rose as high as $1.3493 on Reuters data, the highest since Dec. 2, 2011, and was last up 0.2 percent at $1.3478. It rose above major resistance at $1.3486, its 2012 high and $1.3492, the 50 percent retracement from the high in May 2011 to the low in July 2012.
Analysts at Action Economics said buying by U.K. and German names helped drive the euro’s latest move higher. They said proprietary names and an Asian central bank are on the offer into $1.3500 -- a psychologically important level. Defense of the $1.3500 option barrier may also limit the momentum.
The euro briefly rose and hit a session high after data showed U.S. consumer confidence dropped in January to its lowest level in more than a year.
The dollar dropped against the yen, slipping further away from a 2-1/2 year high hit a day earlier, but analysts said yen weakness will resume as investors look to buy the dollar back at lower levels.
Traders cited demand for 6-month yen puts, or bets the currency would fall, from a U.S. investor who bet dollar/yen would rise to 97 yen in six months through option strikes.
The dollar slipped 0.3 percent to 90.60 yen, down from Monday’s high of 91.25 yen, its strongest level since June 2010. Traders reported options barriers at 91.50 and 92 yen.
Selling the yen has been mostly a one-way trade since mid-November, based on expectations that Japanese Prime Minister Shinzo Abe would push the Bank of Japan into more forceful monetary easing to beat deflation.
“Should there to be any correction down to 88 yen, it would be a good buy area. The overall trend (for dollar/yen) will be higher, particularly in March-April when we start discussing the new BOJ governor,” said Chris Turner, head of FX strategy at ING.
Present BOJ Governor Masaaki Shirakawa, whose term ends in April, is expected to be replaced with a more dovish governor, who could then bring forward any easing, giving further impetus to yen bears.