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Euro heads for third day of gains on Fed talk before ECB meeting

[ATHENS] The euro traded stronger for a third day on the back of dovish rhetoric from Federal Reserve policy makers and bullish options trades before the European Central Bank's meeting on Thursday.

The latest comments by Fed officials lowered the odds of another rate hike by the end of the year and provided no leeway to dollar bulls. The US currency dropped a fifth day, as measured by the Bloomberg Dollar Spot Index, also due to concerns over the looming debt ceiling. A lack of dollar-supportive developments has seen real money names adding shorts this week, according to traders in Europe and London.

Investors also added upside euro exposure in options. As the market remained short-gamma above US$1.20, risk reversals extended their recent gains, fully negating a bearish shift seen after reports that ECB President Mario Draghi might try to jawbone the currency lower at the meeting. Short-term bullish bets in the common currency hit their strongest level in a month.

One-day implied volatility in euro-dollar rose on Wednesday to incorporate ECB-decision risk, sending hedging costs to their most expensive in three months. Option pricing suggests that the common currency's US$1.1823-US$1.2070 range since Aug 29 will hold after Mr Draghi's press conference