TOKYO: The dollar was under pressure on Wednesday, hovering near multi-month lows against higher-yielding currencies, as markets bet the US Federal Reserve would announce more stimulus later in the day.
The euro was also buoyed following surprise strength in German economic sentiment, which contrasted with recent signs that concerns over the fiscal cliff are hurting US economic sentiment.
There was limited reaction in major currencies after North Korea launched a rocket, which critics say is a disguised ballistic missile test, as the news had little immediate implications for the global economy.
"The Fed tends to take preventative steps on the economy, considering the way the Fed started QE3. Given concerns about the fiscal cliff, I think the Fed will do what's been discussed in markets," said Hideki Amikura, forex manager at Nomura Trust Bank.
"In that case, the euro/dollar should rise further," he added.
The dollar index stood at 80.04, flat from late US levels but down 0.5 percent so far this week as the euro popped back above $1.3000, pulling away from a two-week low around $1.2876 plumbed Friday.
The Fed, which ends a two-day policy meeting later on Wednesday, is expected to replace its expiring 'Operation Twist' programme with a fresh round of outright bond purchases.
Many economists believe the US central bank will announce monthly debt purchases of $45 billion.
"Although the view that the Fed will shift to outright Treasury purchases is now very widely shared by market participants, we do not believe it has been fully reflected into markets or in positioning," said Vassili Serebriakov, a strategist at BNP Paribas.
The euro was last at $1.3007, having retraced 50 percent of its Dec. 5-7 fall from $1.3127 to $1.2876, and keeping gains after Tuesday's surprisingly strong Germany's ZEW economic sentiment index.
Morale among German analysts and investors improved sharply in December, fanning hopes that Europe's largest economy may avoid recession this winter despite all the grim news out of other parts of the region.
That contrasted with fall in US consumer confidence, which data showed last Friday posted largest drop since March 2011 in November on worries about the fiscal crisis.
Many investors are expecting US political leaders to eventually reach a deal to reduce the planned fiscal tightening but there has been no concrete sign of progress so far, with top Republican lawmakers rejecting a new offer by President Barack Obama on Tuesday.
Center>Copyright Reuters, 2012