LONDON, Dec 14, 2010 (AFP) - The dollar sank on Tuesday ahead of a Federal Reserve rate decision after Moody's ratings agency warned that US tax-break proposals could damage the outlook and finances for the American economy. In morning trade, the euro climbed as high as 1.3475 dollars, hitting its highest level since November 23. It later stood at 1.3435 dollars, up from 1.3386 dollars in New York late on Monday. Against the Japanese currency, the dollar slid to 83.26 yen from 83.44 yen on Monday. The dollar was hit badly after Moody's announced late Monday that a US tax-break plan could endanger the US top-level credit grade since it would only add to the bloated government deficit and ballooning national debt. Steven Hess of Moody's warned that from a credit perspective, "the negative effects on government finance are likely to outweigh the positive effects of higher economic growth." US President Barack Obama's compromise tax deal with Republicans cleared a key Senate hurdle on Monday and a final vote in the chamber is expected by Wednesday. "The dollar has weakened sharply following comments ... from Moody's that the new US fiscal package has increased the risk that the US's AAA credit rating could be put on negative watch in the next two years," said economist Lee Hardman at The Bank of Tokyo Mitsubishi UFJ in London. "The escalation in sovereign debt tensions in the eurozone has long-term dollar bears licking their lips in anticipation of any potential negative ... impact on the dollar from the unsustainably elevated US fiscal position." Later on Tuesday, at 1915 GMT, the US Federal Reserve's Federal Open Market Committee (FOMC) was widely expected to maintain interest rates at historically-low near-zero levels. "Main focus for today will be the FOMC meeting but no change in the current monetary stance is expected," said VTB Capital economist Neil MacKinnon. "The FOMC (is) likely though to acknowledge the improvement in recent incoming US economic data which will be aided in early 2011 by the Obama tax stimulus -- but at the expense of longer term worries about America's fiscal sustainability." Meanwhile, the euro was boosted as European leaders prepared to take on board plans for a permanent financial rescue system at a two-day summit starting on Thursday. "The officials are obviously intending to take a decision on the future crisis mechanism -- as previously planned," said Commerzbank analyst Ulrich Leuchtmann. "The uncertainty about the exact details of this mechanism has been unsettling the foreign exchange markets for some time." In London on Tuesday, the euro changed hands at 1.3435 dollars against 1.3386 dollars late in New York on Monday, at 111.87 yen (111.71), 0.8460 pounds (0.8444) and 1.2963 Swiss francs (1.2967). The dollar stood at 83.26 yen (83.44) and 0.9649 Swiss francs (0.9681). The pound was at 1.5879 dollars (1.5862). On the London Bullion Market, the price of gold increased to 1,402.97 dollars an ounce from 1,399 dollars late on Monday.

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