* Euro needs to clear $1.3500 to extend recovery
* Single currency hovers near 14-month high set on Tuesday
* Yen edges lower, downtrend seen intact
* US GDP and Fed decision loom, could be USD negative
By Masayuki Kitano
SINGAPORE, Jan 30 The euro held steady near a 14-month high versus the dollar on Wednesday, with market players focusing on whether it can breach resistance at $1.3500 and set itself up for further gains.
Some upbeat German economic data and signs European banks may have turned the corner have bolstered hopes that the worst of the euro zone's crisis has passed, boosting the euro more than 2 percent against the dollar so far this year.
For now, the focus was on technical resistance at $1.3500, where there has also been talk of an option barrier.
"I think there is a possibility of a euro overshoot on the upside," said Sim Moh Siong, FX strategist for Bank of Singapore, adding that a breach of $1.3500 could open the way for the euro to start heading towards $1.3900.
"It is a fact that things are normalising in Europe. But it is also a fact that the structural problems and issues remain unresolved and could come back to haunt the euro," he said, adding that the near-term outlook for the single currency looked positive.
The euro held steady at $1.3495, right near a high of $1.3498 hit on Tuesday, the single currency's strongest level against the dollar since December 2011.
Dealers were also looking ahead to the outcome of the Federal Reserve's first policy meeting of the year at 1915 GMT. The central bank is widely expected to reaffirm its commitment to a super-easy policy until unemployment falls sharply, which could ease concerns about an early end to bond buying.
In contrast, the European Central Bank seems disinclined to ease any further, and that contrast in outlook has helped to bolster the euro this month.
A trader for a U.S. bank in Singapore said that there may be scope for institutional investors to give the euro an added lift, judging from the way they seem to be positioned now.
"I think that their positions are not really built for long (euro) positions yet," the trader said.
News last week about euro zone banks' early repayments of three-year loans to the European Central Bank was seen as a sign that parts of the euro zone banking system may be on the mend, and has helped to bolster the euro.
A survey on Friday that showed improvement in business confidence in Germany, has been another supportive factor.
Against the yen, the euro rose 0.3 percent to 122.75 yen , hovering close to a peak of about 122.90 yen set on Monday, the euro's highest level versus the Japanese currency since April 2011.
The dollar edged up 0.2 percent to 90.97 yen, heading back in the direction of Monday's high around 91.25 yen, the greenback's strongest level since June 2010.
Selling the yen has been mostly a one-way bet since mid-November, based on expectations that Japanese Prime Minister Shinzo Abe would push the Bank of Japan into more aggressive monetary easing to beat deflation.
Present BOJ Governor Masaaki Shirakawa, whose term ends in April, is expected to be replaced with a much more dovish governor, who could then bring forward any easing.
Aside from the Fed, investors are looking out for the first estimate of U.S. fourth-quarter GDP due later on Wednesday, a couple of days before the January jobs report.