NEW YORK (Reuters) - Shares on major markets rose to near a two-month high and the euro gained versus the U.S. dollar on Tuesday after German investor sentiment improved sharply in December and on cautious optimism the United States will avoid a fiscal crisis.
The U.S. dollar weakened as investors steered clear of the currency before a Federal Reserve policy announcement at the end of its two-day meeting on Wednesday. U.S. Treasury prices fell as gains in stocks eroded safe-haven demand for government debt.
Major U.S. stock indexes advanced, led by gains in technology shares. The S&P500 index reached its best levels since mid-October, helping the index end at its best level since the U.S. presidential election day on November 6.
U.S. House of Representatives Speaker John Boehner said he remained hopeful that both sides would reach a deal to avert the "fiscal cliff" of tax hikes and spending cuts by the end-of-year deadline. But Senate Majority Leader Harry Reid said it will be difficult for Congress to reach agreement before Christmas.
"There's been a real explosion in anxiety over this thing. Because markets have become the way they are, you've got people just stepping back," said James Dailey, portfolio manager of TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.
"There's a tremendous absence of liquidity in the market," he said.
The lack of demonstrable progress has kept investors from making aggressive bets in recent weeks. But stocks have steadily marched higher on thin volume.
The Dow Jones industrial average .DJI gained 78.56 points, or 0.60 percent, to end at 13,248.44. The Standard & Poor's 500 Index .SPX rose 9.29 points, or 0.65 percent, to close at 1,427.84. The Nasdaq Composite Index .IXIC added 35.34 points, or 1.18 percent, to 3,022.30.
A 2.2 percent gain to $541.39 in Apple's (AAPL.O) stock lifted the Nasdaq index, as the largest U.S. company by market value rebounded from a week in which investors took profits before a possible tax rise next year. Prior to Tuesday's trading, Apple shares had lost 25 percent from an all-time intraday high hit in September.
The FTSEurofirst 300 index .FTEU3 closed up 0.4 percent at 1,138.85 points, its highest finish since mid-2011. The MSCI global stock index .MIWD00000PUS hit its highest level since October 19 and last rose 0.6 percent to 337.00 points.
Morale among German analysts and investors improved sharply in December, according to a monthly poll by the ZEW think-tank. Its sentiment index jumped to 6.9 against expectations of -12.0, fanning hopes that Germany, Europe's largest economy, will avoid recession this winter.
The U.S. Federal Reserve is expected to announce a new round of Treasury securities purchases on Wednesday, according to a Reuters poll. The program would replace its "Operation Twist" stimulus, which expires at the end of the year.
Many economists believe the Fed will announce monthly bond purchases of $45 billion, although some think it could be more.
"We anticipate the Fed will announce Treasury purchases, and as that depresses yields, it will have a negative impact on the dollar and that supports the euro," said Jane Foley, senior currency strategist at Rabobank.
Expectations of more easing drove the dollar index .DXY down 0.3 percent and pushed the Canadian dollar to a two-month high, while the New Zealand dollar hit a nine-month high.
The euro rose 0.5 percent to $1.3004, while against the yen the dollar was up 0.3 percent at 82.54 yen.
Markets had been rattled on Monday by Italian Prime Minister Mario Monti's announcement he would step down some weeks early. But the upbeat German data helped lift shares and the euro from their gloom.
Benchmark 10-year Treasury notes were trading 11/32 lower in price to yield 1.6558 percent, the highest in over two weeks. Prices held losses after an auction of $32 billion of three-year notes saw lukewarm bidding, as a record low yield perhaps deterred some potential buyers.
In the oil market, Brent crude rose 68 cents to settle at $108.01 a barrel after OPEC said its production declined in November, while the weaker dollar and Middle East unrest also supported prices.
U.S. crude gained 23 cents to settle at $85.79.
Gold fell slightly as hopes of a U.S. budget deal dented the allure of bullion as a safe haven. Investors also pared back bullish bets as they awaited the Fed announcement.
Additional reporting by Richard Leong and Caroline Valetkevitch