By Marc Jones
LONDON (Reuters) - The dollar sat at a more-than-one-year low while stocks climbed on Tuesday as investors bet that subdued U.S. inflation and strains in Washington would limit Federal Reserve interest rate moves for the rest of the year.
The Fed starts a two-day meeting later in the day to discuss its monetary stance and the timing of its long-awaited balance sheet reduction, a plan most likely to be detailed in September.
There is a growing sense that it will want to tread carefully, and markets were reflecting that. They were also boosted by "euphoric" German economic data and Greece's first return to capital markets since 2014.
With U.S, stock markets set to begin the day at or near their all-time highs, volatility was in deep hibernation with the so called "fear gauge" -- the VIX index -- at a 24-year low and only lower twice in its 25-year history.
Google parent Alphabet was down 2.5 percent in premarket trading, after the tech giant flagged up rising costs but the broader market was feeding off a stronger Europe.
Strength among commodity firms and banking stocks, as well as a string of solid corporate results, boosted bourses as the euro, the pound and main Scandinavian currencies took advantage of the soft dollar.
The U.S. currency was stuck at its lowest since June 2016 after a near 4 percent drop over the last month and more than 8 percent fall this year.
"We may see some consolidation here from the dollar but fundamentally our bearish view on it remains," UniCredit Global Head of FX Strategy Vasileios Gkionakis said.
"What the Fed says tomorrow is the million dollar question... but the risk is that they sound a bit more cautious after the fourth consecutive downside surprise in inflation."
Against the yen, the dollar did manage to put up a bit of fight, edging up to 111.380 yen having slipped as low as 110.625 yen - its lowest since mid-June - the previous day.
The yen had yielded as two new Bank of Japan policymakers said it would be premature to even talk about ending its massive monetary stimulus. Analysts see the dollar under 110 yen though, if the Fed shows any serious concern this week.
The political troubles of President Donald Trump's White House continue to mount too, with investigations into his pre-election links to Russia deepening.
Trump blasted the probes again in a pair of early morning tweets aimed at his attorney general. There is also growing anxiety about the United States hitting another debt ceiling in October with few options to potentially offset that.
The debt ceiling issue has started to cause problems at Treasury bill auctions and the three-month T-bill yield rose above the 6-month equivalent late Monday to account for the outside risk of a technical default.
EURO-PHORIC
The euro got a boost early on as German business morale hit a new high, with firms "euphoric" according to the Munich-based Ifo economic institute that compiles the data from 7,000 of them in Europe's largest economy.
"Hardly anything seems to be able to hit the German economy," Ifo economist Klaus Wohlrabe added, saying with reference to the euro's recent sharp rise that German business was experienced in managing the impact of exchange rate moves.
The IMF also was expected to give an upbeat euro zone report later. Greek government borrowing costs hovered near their lowest level since 2010, meanwhile, as the country sold its first longer-dated bond in three years at 4.625 pct.
Some five years since European Central Bank Mario Draghi pledged to do "whatever it takes" to preserve the euro, the debt sale by Greece was the clearest sign yet of the bloc's recovery from its crippling debt crisis.
It spurred demand for other low-rated debt, with bonds of Portugal and Spain outperforming those in powerhouse Germany and the gap between Italian and German 10-year yields dropping to its smallest since December 2016.
"Confidence in Greece is really coming back, but we need to continue the good work. We need to be on the bicycle, and to keep on pedalling," Europe's economics commissioner, Pierre Moscovici, said.
In commodities, oil prices extended their recovery on a pledge by leading OPEC producer Saudi Arabia to cut exports in August to help reduce the global crude glut. Halliburton Co's executive chairman also said the U.S. shale drilling boom would probably ease next year.
U.S. crude jumped 1.6 percent to $47 a barrel, after closing up 1.25 percent on Monday.
Global benchmark Brent added 1.55 percent to $49.35, extending Monday's 1.1 percent rise.
The rise in risk appetite stalled gold, with the precious metal dipping almost 0.3 percent, or 5 cents, to $1,250 an ounce.
(Reporting by Marc Jones; Editing by Mark Trevelyan/Jeremy Gaunt)
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