The euro hit a one-week high versus the dollar and the yen on Tuesday on a surprise rise in German corporate sentiment, while easing risk aversion kept the Japanese currency under broad selling pressure. German's Ifo economic research institute said that its business climate index rose to 83.0 in January from an upwardly revised 82.7 in December, exceeding forecasts and posting its first improvement in eight months. The figure suggested that businesses are slowly gaining confidence following the government's announcement of an economic stimulus package, although analysts warned against becoming too optimistic about the German economy. "It's a short-term relief to see that there hasn't been a further deterioration from the December reading but whether it is sustainable is rather debatable," said Audrey Childe-Freeman, senior FX strategist at Brown Brothers Harriman in London. Pointing out that the rise was likely due to a weaker euro at the start of the year and lower oil prices, she added: "We can't get carried away. The core data for Germany remains poor and the outlook for the German economy remains rather bleak." The yen fell broadly after a pledge by the Japanese government to inject capital into ailing companies prompted some investors to take on riskier trades, which helped to support the euro and sterling. A slight improvement in risk demand prompted some selling in the dollar ahead of a two-day policy meeting by the Federal Reserve that begins on Wednesday. Investors are waiting for the post-meeting statement to see whether the U.S. central bank will implement more quantitative easing measures to help the economy. By 1017 GMT, the euro traded 0.8 percent higher at $1.3270, having climbed as high as $1.3328, its strongest in a week, after the Ifo figures were released. While the pair pulled away from the high, it kept its distance from a six-week low around $1.27 hit late last week. The euro traded 1 percent higher at 118.40 yen after hitting the day's high of 119.45 yen, a level last reached on January 19. The yen stumbled due to improving risk demand after Japan launched a $16.7 billion scheme to buy shares in firms whose future has been threatened by the financial crisis. "The news from Japan is positive for risk appetite, and has provided a firm undertone in the market," said Anders Soderberg, chief currency strategy at SEB Merchant Banking in Stockholm. The low-yielding yen often takes its cue from perceived swings in investors' risk appetite and has tended to fall against higher-yielding currencies when risk tolerance increases. FED AWAITED The euro was supported, but gains were capped as European shares reversed early gains to trade 0.5 percent lower .FTEU3, having failed to take a cue from a rally in Tokyo stocks. Improving risk appetite pushed the yen lower across the board, boosting the dollar by as much as 1 percent to a one-week high of 90.07 yen, before pulling back to 89.42 yen.

Source