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LONDON (Reuters) - The euro hit its highest level in over a year and shares and commodities also rose on Wednesday helped by optimism about the global economy ahead of a U.S. Federal Reserve policy decision.
The Fed is expected to maintain asset buying at $85 billion a month when it concludes its meeting later and stick to its commitment to hold interest rates near zero until unemployment falls to at least 6.5 percent.
Ahead of the decision, a rise in European economic confidence, ECB crisis loan repayments and Italy's solid sale of five and 10-year bonds provided investors with fresh evidence of a better sentiment in the region.
The euro broke above $1.35 for the first time since December 2011.
European shares were down 0.3 percent by 1125 GMT, but an earlier rise in Asian equities meant the MSCI world share index was holding firm at a new 21-month high.
U.S. stock futures suggested a steady start on Wall Street where focus will be on the Fed's outlook for the economy and its bond buying program after it sounded slightly more hawkish last month.
Alongside the recent rebound in confidence in the euro zone, one of the drivers behind the recent spike has been the eagerness of banks to repay the crisis loans they took from the European Central Bank just over a year ago.
Banks returned 137.2 billion euros of those loans on Wednesday and surprised analysts again by also trimming their three-month funding despite predictions they would use it to partly restock their coffers.
"It (the euro rise) is just a carry on with the current trend, risk is pretty healthy and equities are doing well," said Bank of Tokyo Mitsubishi strategist Derek Halpenny.
"The danger is European policymakers allow a spike (in euro and market rates) as a result of a removal of one of the principle support measures ... With the Fed and the BOJ still easing the euro is clearly the path of least resistance."
New data from Brussels showed euro zone economic sentiment improved more than expected across all sectors in January, rising for the third time in a row in a sign the economy could be emerging from a low point in the fourth quarter of 2012.
However, Spain's economy sank deeper into recession in the fourth quarter of 2012, shrinking at the fastest pace in a year as budget cutbacks and high unemployment prompted households to slash spending.
An ECB survey of Europe's banks also darkened the mood, showing that most expect to continue toughening up their lending rules in the coming months and see another drop in demand for loans.
Strong U.S. housing data on Tuesday and China's promising economic growth forecast for 2013 raised expectations for robust demand for fuel and industrial commodities, underpinning oil prices and lifting copper.
In the bond market, traditional safe-haven German bonds fell after a solid Italian debt auction underscored the new appetite from yield-hungry investors for peripheral euro zone debt.
Just six months ago yields on Italian and Spanish debt soared but the ECB's promise to keep the euro together has prompted a turnaround. Rome sold 3.5 billion euros ($4.7 billion) of 10-year bonds at 4.17 percent on Wednesday, its lowest cost since October 2010.
"(It went) pretty well. They achieved the target without too much difficulty, and the average yield is certainly lower than previously," said Nick Stamenkovic, a bond strategist at Ria Capital Markets in Edinburgh.
"What we've been seeing recently is increased demand particularly from overseas, for Italian bonds, not just the short end but particularly the longer end... I think today's auction provides further evidence that is indeed occurring."
Additional reporting by Ana Nicolaci da Costa; Editing by Giles Elgood and Anna Willard