FOREX-Euro rises on German investor sentiment, dollar dips before Fed
* Euro gains as German ZEW at highest since April 2010
* But rise limited as focus centers on U.S. Fed meeting
* Markets expect modest tapering of stimulus by Fed
NEW YORK, Sept 17 (Reuters) - The euro rallied against the dollar on Tuesday after a better-than-expected reading in a German sentiment survey, but gains were muted before a U.S. Federal Reserve meeting expected to result in a cut in stimulus.
The German ZEW think tank's economic sentiment poll rose to its highest level since April 2010, suggesting a growing sense of financial well-being that could support Chancellor Angela Merkel's chances of winning a third term in Sunday's election.
The euro's gains were limited, however, with traders reluctant to make fresh bets before the Fed's two-day policy meeting, which begins later on Tuesday. A recent Reuters poll showed economists expect the Fed to reduce monthly asset purchases by a relatively modest $10 billion.
"The euro's slightly resilient tone is a result of ZEW and the uncertainty surrounding the Fed tomorrow," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "We are probably on hold until the Fed with the risk to the dollar being the statement if they taper as expected but try to anchor expectations that rates will remain low."
Analysts say rate hike expectations hold the key for the dollar because of their impact on short-term U.S. bond yields.
The dollar retreated on Monday after former Treasury Secretary Lawrence Summers withdrew his name from the list of candidates to lead the Federal Reserve, reducing the chances of a rapid cut in monetary stimulus.
The euro was last up 0.2 percent at $1.3360 on Tuesday, nearing a peak of $1.3385 hit on Monday, its highest since late August.
The dollar was down 0.15 percent versus a basket of currencies at 81.125, though it held above a four-week low of 80.968 set on Monday. It was last up 0.1 percent at 99.1 yen but was expected to stay below chart resistance around 100 yen.
The dollar did pare gains against the yen after a report showed U.S. consumer prices barely rose in August, which eases the way for the Fed to start trimming its bond purchases. 1/2ID:nL2N0HC1K4 3/8
A separate U.S. Treasury report showed foreigners regained an appetite for long-term U.S. securities in July, moving back into U.S. government bonds after unloading a record number of those assets in June.