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Euro edges off eight-week lows ahead of ECB meeting

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The euro edged off eight-week lows on Thursday as traders readied for a European Central Bank meeting, when investors will be searching for any signals about when the bank will begin unwinding its stimulus.

[LONDON] The euro edged off eight-week lows on Thursday as traders readied for a European Central Bank meeting, when investors will be searching for any signals about when the bank will begin unwinding its stimulus.

The single currency rose 0.1 per cent to US$1.2168 but remains 2-1/2 cents off levels hit only last week, after a bounce in US Treasury yields fired up US dollar buying and encouraged some to question whether the euro's rally since last year had run out of steam.

The ECB decision is due at 1145 GMT and president Mario Draghi will begin his press conference at 1230.

"Draghi is likely to reiterate the need for patience and prudence in the conduct of monetary policy and to avoid addressing the specific timing on the next policy move," BNP Paribas analysts said, adding that such comments would be unlikely to help euro/dollar bulls.

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"Euro/dollar continues to fall as long positioning gets pared back against a backdrop of negative realised returns and we remain tactically bearish on the pair," the analysts said.

After a strong rally into February, the euro has since been stuck in a trading range against the US dollar as investors pared back expectations of an ECB moving rapidly towards the end of its monetary stimulus programme.

In recent days the euro has sold off heavily and a fall below US$1.2154, its March 1 low, would leave it at its weakest since mid-January.

Elsewhere Sweden's crown, one of the worst performing G10 currencies in 2018, fell after its central bank kept interest rates unchanged and said continued monetary support was needed given inflation remained weak.

Most investors are bearish on the crown, believing the Riksbank will stick its ultra-dovish tone even as the ECB acts. The crown fell 0.2 per cent to 10.43 crowns versus the euro, and it was also down 0.2 per cent against the US dollar.

US DOLLAR STRENGTH

With the euro falling, the dollar traded near a 3-1/2-month high against a basket of currencies, bolstered by the 10-year Treasury benchmark yield breaching the 3 per cent threshold for the first time in four years.

The rise in yields was driven by worries about the growing supply of government debt and inflationary pressures from rising oil prices.

The recent jump in US bond yields has caused US-Japan and US-German yield differentials to widen further in the US dollar's favour, leaving the yen and the euro lower.

"Unless there is a very unlikely massive meltdown in US equity markets, it is doubtful the Fed will waver on a June rate hike," said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

"With equity market sentiment holding firm in the face of rising bond yields, the almighty dollar could move through G-10 currency markets like a wrecking ball," Mr Innes added.

Against the yen, the US dollar set a 2-1/2-month high of 109.49 yen but later eased to 109.285 yen, down 0.1 per cent.

The US dollar also paused against the Australian and Canadian dollars after recent gains.

REUTERS