Graphic: renjith krishnan

The dollar dropped against the euro Tuesday as the Federal Reserve opened a two-day meeting expected to expand its outright bond purchases to replace the expiring Operation Twist.

The euro also got a boost from a surge in German investor sentiment to a seven-month high.

The yen meanwhile pushed lower against both currencies days before the December 16 general election, with the opposition Liberal Democratic Party favoured in polls and likely to send pro-stimulus Shinzo Abe back to the premiership.

The dollar was buying 82.51 yen, up from 82.33 yen Monday. The euro was at 107.28 yen, compared to 106.53 yen a day earlier.

Most eyes were on the Fed, which will announce its policy stance at 19:30 SA time Wednesday.

Gathering just before its “Twist” asset-swap operation expires at year-end, signs are that the Federal Open Market Committee will replace it with more outright bond purchases, more “quantitative easing” aimed at lowering interest rates to encourage businesses to invest and hire.

Analysts say the new program could be worth $45 billion a month, increasing the Fed's monthly asset buys to $85 billion in total.

But David Song of DailyFX said he was looking for signs that the Fed is getting more optimistic.

“It seems as though the central bank is nearing the end of its easing cycle as Chairman Ben Bernanke holds an improved outlook for 2013,” he said.

“In light of the more broad-based recovery in the world's largest economy, Chairman Bernanke may strike a more neutral tone for monetary policy, and a shift in central bank rhetoric may pave the way for a US dollar rally as market participants scale back bets for more quantitative easing.”

The dollar slipped to 0.9319 Swiss francs, while the British pound rose to $1.6110. - Sapa-AFP