* Euro higher on Middle-East demand, strong German survey
* Dollar index hits weakest level in eight weeks
* Focus remains on euro zone rescue plan
* Sterling hits 8-wk high vs dlr after inflation data
(Recasts, adds quotes, updates prices, changes byline)
By Julie Haviv
NEW YORK Jan 18 (Reuters) - The euro rose against the dollar on Tuesday on buying by sovereign funds and strong German data, with more gains seen as expectations for higher interest rates assuage fears of fiscal woes on the euro zone periphery.
The euro soared more than 1 percent against the dollar after Germany, Europe's largest economy, showed its ZEW headline economic sentiment indicator surged to its highest reading in six months, jumping to 15.4 points in January from 4.3 points in December and racing past forecasts for a reading of 6.8..
The euro hit session highs as a move above key technical levels pointed to further strength in the euro zone single currency. The euro rose as high as $1.3467 on trading platform EBS and was last trading up 1.2 percent at $1.3448.
It rose above a key 100-day simple moving average at around $1.3423, with traders citing buying by a large Middle East central bank.
"Technically, the outlook for EUR (the euro) is turning increasingly bullish, with 1.35 an important level of resistance," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
"Our core view is that EUR will stabilize this quarter and retrace some of the losses it suffered last fall," she said.
The data helped the euro gain on demand from Middle East accounts and reports Russia was considering buying euro zone debt, a trader said.
JP Morgan Private Bank's Childe-Freeman said there was some optimism that EU leaders were responding faster than in previous crises, but she said the euro would face strong resistance at $1.35 until there was more information on the rescue plan.
Russia's Finance Minister Alexei Kudrin said on Tuesday the country was supportive of the euro zone's efforts to see off a debt crisis and could buy new bonds from its European Financial Stability Facility (EFSF) rescue fund.
But he knocked down a newspaper report that Russia, holder of world's third largest reserves, was ready to resume buying Spanish debt, which it dropped as an investment after Spain was downgraded in November..
Germany's ZEW numbers came less than a week after comments on inflation from European Central Bank President Jean-Claude Trichet prompted talk that euro zone interest rates could rise sooner than previously thought.
The euro has outperformed the dollar in six of the past seven sessions, contributing to upbeat outlooks for the currency shared by 17 nations.
The euro's gains helped push the dollar to its weakest in eight weeks against a basket of currencies at 78.686. It last traded at 78.812.
U.S. economic data is light side this week, but upcoming reports on housing starts and existing home sales could sway the dollar. Earnings reports from key U.S. financial companies may also influence sentiment.
EURO ZONE FOCUS; STG, CAD GAIN
Continued uncertainty over plans to beef up the euro zone's rescue fund could limit the euro's upside.
Doubts euro zone policy-makers would reach a quick decision on enhancing a rescue fund to quell a sovereign debt crisis remained the euro's Achilles' heel.
European finance ministers agreed on Tuesday to take their time over strengthening the euro zone's rescue fund and delay publishing new stress tests on the region's shaky banks until the second half of the year.
"There are still faultlines, especially pertaining to issues about the expansion of the rescue fund," said Simon Derrick, head of currency research at Bank of New York Mellon. "But countries like Russia and China need the euro as a credible alternative currency."
Sterling also hit an eight-week high of $1.6060 after much higher-than-forecast UK inflation data while the Canadian dollar hit a two-and-a-half year high of C$0.9837 per U.S. dollar.
The Canadian currency was boosted ahead of a Bank of Canada policy decision at 1400 GMT. Rates are expected to be left at 1.0 percent, but it is expected to raise its forecast for 2011 growth.
The euro was up 0.70 percent against the yen at 110.72 yen.
(Additional reporting by Gertrude Chavez-Dreyfuss in New York and Anirban Nag in London, Editing by W Simon )