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Euro up on Draghi's inflation comments

THE euro inched higher on Tuesday despite a European Central Bank official playing down its president Mario Draghi's comments a day earlier about "relatively vigorous" inflation.

The dollar held steady in generally quiet European trading before the US Federal Reserve's two-day policy meeting begins later on Tuesday.

The euro had hit a 31/2-month high on Monday after Mr Draghi expressed confidence in eurozone inflation and wage growth, before giving up most of those gains.

The ECB's chief economist Peter Praet said on Tuesday there was nothing new in Mr Draghi's comments, but the single currency managed to find strength.

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Most analysts have interpreted Mr Draghi's speech as hawkish - eurozone money markets brought forward their expectations for a 10 basis point ECB rate hike to September from October 2019 - helping to underpin the single currency.

The euro gained 0.1 per cent to US$1.1762. On Monday it had surged to as high as US$1.1815.

"The second step in the ECB policy normalisation (hiking the depo rate following the already well telegraphed end of QE) and its positive impact on the euro is one of the cornerstones of our bullish EUR/USD 2019 forecast," ING analysts said.

"Yet we feel it may still be too early to position for the ECB-induced euro upside at this point," they wrote, adding that they expected monetary policy to boost the euro in early 2019.

Broader currency markets were largely quiet on Tuesday as the latest round of tariffs in the US-China trade conflict kept investors on edge, and with an expected Federal Reserve rate rise - the third in 2018 - mostly priced in by traders.

"There is a general lack of impulses. The market is not reacting (to the trade war) because we are not seeing any economic impact. The other big driver (of currencies) is usually monetary policy but the FOMC is going to be a non-event," Thu Lan Nguyen, a strategist at Commerzbank in Frankfurt, said, referring to the Federal Open Market Committee.

The dollar index, which measures the greenback against a basket of six major currencies, was flat at 94.194 as investors wait for the Fed meeting to glean some clues on the path for further rate hikes.

Against the Japanese yen, the greenback rose 0.1 per cent at 112.89 after the release of minutes from the Japanese central bank's July policy meeting showed a few board members said the Bank of Japan must consider more seriously the potential dangers of ultra-easy policy.

The Australian dollar, a gauge of broader risk appetite that has weakened sharply this year on worries about a Chinese economic slowdown, traded 0.1 lower at US$0.7251. REUTERS