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Euro inches up, hovers near 3-week high as focus shifts to ECB

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The euro held firm near a three-week high versus the US dollar on Thursday, as investors turned their attention to the European Central Bank's policy meeting later in the day, and as the greenback was dragged down by a drop in US bond yields.

[SINGAPORE] The euro held firm near a three-week high versus the US dollar on Thursday, as investors turned their attention to the European Central Bank's policy meeting later in the day, and as the greenback was dragged down by a drop in US bond yields.

The euro has been the main focus for traders this week after Italian Prime Minister Matteo Renzi said he will resign after suffering a stinging defeat in a referendum on constitutional reform.

After initially dropping on the weekend news, the euro rallied strongly on Monday and has since held below three-week highs against the US dollar as investors wait on the ECB.

The ECB is expected to announce a six-month extension to its quantitative easing programme on Thursday, while keeping the size of asset purchases unchanged at 80 billion euros (S$122 billion), according to a majority of economists polled by Reuters.

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Emphasising abundant risk, including from forthcoming elections in Europe, ECB President Mario Draghi is expected to argue that premature tapering - or slowly ending - bond-buying could abort a still timid recovery, unravelling the impact of the buys.

The euro edged up 0.2 per cent to US$1.0769 after gaining 0.3 per cent on Wednesday. It was trading within sight of Monday's peak of US$1.0797, its highest level since Nov 15.

On Monday, the euro had initially slumped to US$1.0505, its lowest since March 2015 in a knee-jerk reaction to the outcome of the Italian referendum.

It then quickly rebounded as a worst-case political scenario for Rome appeared to have been averted for the time being.

After Mr Renzi's resignation, most parliamentary factions pushed for an early election in a few months' time.

While the market remains concerned about the risk of an early election being called in Italy, the focus at the minute was on the ECB meeting, said Shinichiro Kadota, senior FX strategist for Barclays in Tokyo.

"The market is concerned about that risk," Mr Kadota said, referring to the possibility of an early election.

"I think the market will reassess the situation after seeing what comes out of the ECB," he added.

The US dollar index, which measures the greenback against a basket of six major currencies, stood at 100.09, down from Wednesday's intraday high of 100.60.

On Wednesday, the US dollar index had slipped by about 0.2 per cent as US bond yields slipped back.

The US dollar eased 0.1 per cent versus the yen to 113.62 yen.

There was limited reaction to a downward revision to Japan's July-September gross domestic product (GDP) data, which showed lower than expected growth of 0.3 per cent quarter-on-quarter, compared to market expectations for 0.6 per cent growth.

In late November, the US dollar index had set a 13-1/2 year high of 102.05, having rallied as US bond yields surged on expectations of higher fiscal spending and a faster pace of Federal Reserve monetary tightening under President-elect Donald Trump.

REUTERS

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