FOREX-Dollar weakens ahead of Fed outcome; euro up on strong data
* Euro gains as German ZEW index at highest since April 2010
* Rise limited as focus centers on Fed meeting
* Markets expect any Fed tapering of stimulus to be modest
NEW YORK, Sept 17 (Reuters) - The dollar struggled against most currencies on Tuesday as investors were reluctant to make fresh bets ahead of the outcome of a Federal Reserve meeting expected to result in a reduction of its massive stimulus program. The euro, on the other hand, rose after an upbeat German sentiment survey. The ZEW think-tank's poll of economic sentiment rose to its highest since April 2010, suggesting a growing sense of stability that could support German Chancellor Angela Merkel's chances of winning a third term in Sunday's elections. That enabled the euro to hit the day's highs against the dollar at $1.3369. The euro's gains, however, were limited in the run-up to the Fed's two-day policy meeting, which started on Tuesday. A recent Reuters poll showed economists expect the Fed to reduce its $85 billion in monthly asset purchases by a relatively modest $10 billion. The dollar index, a gauge of the greenback's value against six major currencies, fell 0.2 percent to 81.142, declining for a fifth straight session. "The recent weak undertone of the U.S. dollar as policy makers debate the scope and extent of tapering the Fed's quantitative easing has provided a reprieve to emerging markets central bankers who were battling capital outflows during May and June," said Samarjit Shankar, director of market strategy at BNY Mellon in Boston. Analysts said 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 last traded up 0.2 percent at $1.3359, nearing a peak of $1.3385 hit on Monday, its highest since late August. Against the Japanese yen, the dollar was last up 0.1 percent at 99.17 yen, but was expected to stay below chart resistance around 100 yen. The dollar, however, remains undervalued against the yen at current prices, with a fair value of 104.85 yen, according to data from BNP Paribas. The increase in the currency pair's value corresponds to the rebound in Japan's equities this month. Weakness in the yen normally is viewed as positive for the Japanese stock market where many companies traded are exporters, which benefit from a soft currency. The dollar briefly pared 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 report showed foreign investors rediscovered a taste for long-term U.S. securities as Japan's and China's holdings of U.S. government bonds increased. In June, U.S. Treasuries suffered a record outflow. According to Treasury data released on Tuesday, foreign holdings of long-term U.S. securities increased by $31.1 billion in July after plunging by $67 billion the prior month.