The dollar rose against the euro and yen on Tuesday as investors positioned themselves ahead of an expected US interest rate rise, shrugging off strong euro zone data.
The US Federal Reserve is widely expected to bump up its key rate for a 13th straight time to 4.25 percent after its meeting on Tuesday. "The Fed is the major focus - we're looking for a statement that's effectively not that much changed, but it won't take much change to impact the market," RBS Financial Markets currency strategist Adrian Schmidt said.
A strong gain in a key euro zone indicator failed to shake the dollar's progress, with the euro spiking only briefly higher after a survey showed German investor sentiment improved to its best level in almost two years in December.
The Mannheim-based ZEW institute said its German economic expectations indicator, based on a survey of 317 analysts and institutional investors, jumped 22.9 points to 61.6, far above its long-term median of just over 34 and up sharply from a November reading of 38.7.
"This (data) bodes well with hopes for an improving economic performance from Germany in the fourth quarter and should be seen as a euro positive," CIBC World Markets economist Jodie Saul said.
Analysts said the ZEW's jump was due in part to softening oil prices and reduced uncertainty over economic policy from the new German government, but the survey's impact was short-lived as investors returned to focusing on the upcoming Fed meeting.
By 1252 GMT, the euro was down 0.28 percent at $1.1923, having spiked to $1.1942 immediately after the ZEW survey. However the currency was still fairly close to a five-week peak around $1.1985 struck on Monday.
The dollar was up half a percent against the yen at 120.28 yen.
Markets are looking for clues on whether the US central bank in its post-meeting statement will tweak the wording it has used over and over since June 2004 to indicate higher rates are in store.
"A 25-basis-point hike is a done deal but the tone of the statement will be more interesting," said Kamal Sharma, currency strategist at Bank of America.
"I think ... they will take the market in a direction to suggest that rates are probably likely to peak in March - that's what the market is worried about."
Against the Canadian dollar the US dollar was buying C$1.1521, near a 14-year low of C$1.1494 hit in the previous session.
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