FOREX-Euro wary as ECB policy decision looms, BOJ eyed

Reuters

* Euro off lows versus USD as markets trim bearish positions

* Uncertainty over more action from ECB keeping euro bears wary

* No new stimulus expected from BOJ, for now

By Ian Chua

SYDNEY, Sept 4 (Reuters) - The euro clung on to modest gains against the dollar early on Thursday, having pulled up from one-year lows as investors booked some profits ahead of the European Central Bank policy review.

News of a ceasefire plan in eastern Ukraine further shored up the common currency, although this is now in doubt after Ukraine's prime minister dismissed the proposal outlined by President Vladimir Putin.

The common currency has already fallen a long way, dropping from a high of $1.3701 on July 1 to $1.3110 on Tuesday. It last traded at $1.3151.

The steadier euro knocked the dollar index off a 14-month peak of 83.058 to 82.838.

Traders said euro bears were just taking a breather due to uncertainty over whether the ECB will actually deliver a fresh round of policy stimulus or simply lay the groundwork to act at a later date.

To be sure, the ECB is under strong pressure to tackle stubbornly low inflation at a time when the conflict in Ukraine threatens to destabilise the region's fragile recovery.

"We expect them to reduce the main refinancing rate by 10bps to 0.05 percent, also reducing the marginal lending and deposit rates by similar amounts, taking the deposit rate down to 0.2 percent," said David de Garis, senior economist at National Australia Bank.

"A failure to cut tonight could jeopardise bank involvement in the first round of TLTROs (bank refinancing loans) as many would wait to bid until December with borrowing rates expected to be lower by then."

In contrast, the Bank of Japan is expected to maintain its massive monetary stimulus on Thursday and cling to its argument that the bigger-than-expected hit from a sales tax rise will prove temporary.

Against the yen, the euro traded at 137.84, having scaled a seven-week peak of 138.28 overnight.

The common currency, however, dipped back towards a 13-month trough against a broadly stronger Australian dollar. It traded at A$1.4070, nearing the low of A$1.4034.

The Aussie dollar was a notable outperformer after data on Wednesday dispelled fears that economic growth had stalled in the second quarter.

Aussie bulls were given a further boost after the country's central bank chief played down the chances of further interest rate cuts.

All that combined to lift the currency to $0.9347 from a two-week low of $0.9263. Against the yen, the Aussie rallied to its highest in over 14 months at 98.14.

In the short term, the Aussie's outlook hinges on local retail sales data due at 0130 GMT. Any upside surprise will no doubt give it a further boost.

The other major currencies marked time ahead of the ECB policy decision and Friday's U.S. jobs report. The dollar lost a bit of ground against the yen, slipping to 104.84 from an 8-month high of 105.31.

The Canadian dollar firmed slightly after the Bank of Canada highlighted its concern about an overstretched household sector as it stuck to a neutral stance.

It climbed to C$1.0871 per U.S. dollar, from C$1.0943, before settling at C$1.0889 in early Asian trade.

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