* Euro hits 16-month peak vs dollar
* Dollar seen weighed down by accommodative Fed policy (Recasts; updates prices, adds details)
NEW YORK, April 26 (Reuters) - The euro advanced to a 16-month high against the dollar on Tuesday, with little in the way of its advance as long as the U.S. Federal Reserve still lags other major central banks in raising interest rates.
The Federal Open Market Committee, the Fed's policy-making arm, starts its two-day meeting on Tuesday.
The post-meeting news conference by Fed Chairman Ben Bernanke on Wednesday -- the first regularly scheduled news briefing by a Fed chief in the U.S. central bank's 97-year history -- will be closely watched to see how the Fed plans to exit from its ultra-loose policy.
"We still feel that the market is too optimistic of U.S. growth and how soon the Fed may be required to act," said Bill Chepolis, portfolio manager at DWS Investments, Deutsche Bank's retail asset management business, in New York.
The European Central Bank last month raised rates for the first time since July 2008. While some believe this may prompt the Fed to tighten monetary policy sooner, financial markets are still in a "carry trade" environment, he said.
The carry trade involves financing at low rates and investing the proceeds in higher-yielding assets.
Chepolis, who oversees roughly $10 billion in assets, said this means that they still feel U.S. sectors such as investment grade corporate bonds and high-yield credit, and some structured asset classes offer value relative to Treasuries.
The euro
The break to a new high opens up a test toward $1.48, and the euro could then test $1.50 in the coming weeks if Bernanke indicates that the Fed's accommodative policy may continue for the foreseeable future, a forex technical analyst said.
The Fed is far more reluctant to tighten policy than the ECB, a divergence largely behind the euro's 9.3 percent gain in 2011.
"The euro bloc seems committed to making things work for the union so we are slightly positive on those bonds especially shorter maturity," Chepolis said.
The Fed is expected to say it will stick to its plan to complete a $600 billion bond-buying program in June. For details, see [ID:nN1941922]
If, however, the Fed surprises the market and turns more hawkish it will pose a risk to the sizable amount of dollar shorts in the currency market," Chepolis said. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For graphic on Fed funds rate hike expectations: http://r.reuters.com/xyz48r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
"Bernanke is likely to acknowledge that dollar policy is set by the Treasury, but the Fed takes it into account in terms of its impact on inflation and growth and that it is part of the transmission mechanism of monetary policy," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
"Investors are unlikely to learn from Bernanke when the Fed will tighten as it is doubtful that he himself knows," he added.
The euro got a boost from investor relief at the sale of close to 2 billion euros of short-term debt by Spain, wiping away earlier losses after comments by European Central Bank President Jean-Claude Trichet. [ID:nLDE73P0LT]
The dollar index, which measures the currency's value against six major currencies, was down 0.3 percent at 73.798 <.DXY>.
Traders say it could test a three-year low of 73.735 hit last week. A break of that could open the way for a test of the record low of 70.698 touched mid-July 2008, according to Reuters data.
Against the yen
The Australian dollar