* Euro rises to $1.2998 vs dollar * Hopes rise before euro zone finmin meeting on Greece * Dollar dented ahead of FOMC meeting * Australian dollar hits 11-week high vs U.S. dollar By Jessica Mortimer LONDON, Jan 23 (Reuters) - The euro hit its highest level in nearly three weeks against the dollar on Monday on tentative optimism that Greece will cut a deal with its creditors on a debt swap and avoid a chaotic default. Market players were looking to a euro zone finance ministers' meeting on Monday when ministers were due to decide the terms of a Greek debt restructuring they would be ready to accept in order to pave the way for a second bailout package for Athens. However, the single currency was still vulnerable to renewed weakness as uncertainties remained about the outlook for Greece and other highly indebted euro zone countries. Private creditors said on Sunday they had come to the limits of what losses they could concede, putting the ball in the court of the European Union and the IMF. The euro was supported by investors taking profit on short positions. Data showed speculators boosted net euro short positions to a fourth straight record in the week to Jan. 17. The euro was up 0.4 percent at $1.3001, its strongest since early January. Traders cited demand from Middle East accounts that lifted the currency through reported offers at $1.2950. "There is some focus on the record short euro positions ... and a potential that the euro could go above $1.30 if there is a positive response to the Greek debt talks," said RBS currency strategist Ankita Dudani. "The likelihood is that the talks will converge somewhere where a deal is still voluntary." Resolving the issue of a Greek debt swap is key to putting Athens' debt on a sustainable path and avoiding a chaotic default that could threaten the whole currency bloc. Markets had hoped for an agreement over the weekend, and analysts said they were still betting on a deal, leaving room for disappointment. "It is uncertain what will happen with the restructuring of Greek debt, and after that there will be tough negotiations with the EU and the IMF about the next financing facility," said Niels Christensen, currency strategist at Nordea in Copenhagen. "The major risk to euro/dollar is to the downside, especially after the small bounce last week which took out some of the riskier short positions." The euro was not expected to sustain a move above $1.30 and was still seen at risk of testing a 17-month low of $1.2624 hit earlier this month. Traders said a clear break below $1.2870-80 could see major support at $1.2800-10 tested. DOLLAR DIPS For the wider market, the Federal Reserve's two-day policy meeting starting on Tuesday will be the major event. Although no policy change is expected, the Fed could take the historic step of announcing an explicit target for inflation as part of its new communication strategy. Traders said wariness ahead of this meeting and expectations of a continued easy monetary policy was helping to weigh on the dollar, pushing the dollar index below the 80.0 level. It was last down 0.4 percent at 79.902. The Australian dollar hit an 12-week high versus the U.S. dollar at $1.0558, with investors favouring the high-yielding currency and the sound fundamentals of the Australian economy. The euro was up 0.4 percent against the yen at 99.88 yen , taking it close to last week's peak around 100.33. The euro could see choppy trading early this week, with low volumes exacerbating volatility, as many Asian centres including China, Hong Kong and Singapore are closed for the Lunar New Year holidays.

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