By Anirban Nag
LONDON (Reuters) - The euro fell to a 1-1/2 month low against a buoyant dollar on Tuesday, weighed by expectations that the European Central Bank will reiterate its pledge to keep interest rates low to support a nascent recovery.
The dollar was helped by a rise in U.S. yields, with the interest rate-sensitive 2-year Treasury note yield trading at 0.42 percent, its highest since July 2011. Investors are betting the Federal Reserve may start withdrawing monetary stimulus, perhaps as early as this month, especially if the U.S. jobs market shows more signs of improvement.
That is likely to help the dollar against major currencies since the ECB, the Bank of England and the Bank of Japan have all pledged to keep policy ultra-loose for longer.
The euro fell to $1.31605 on trading platform EBS, its lowest level since July 22 and was trading lower on the day. Its weakness saw the dollar index gain 0.3 percent to trade at 82.228, its highest level in a month.
"Investors do not want to be long euros heading into the ECB meeting this Thursday," said Geoffrey Yu, currency strategist at UBS. "We haven't heard for a while from (President Mario) Draghi. We expect him to say conditions remain soft despite an improvement in the data and pledge to keep rates low."
The one-month euro/dollar implied volatility, a gauge of expected price swings and derived from option prices, has also risen to 1-1/2 month highs of around 8.6 percent.
While the ECB is expected to keep monetary policy loose, traders expect the Fed to start reducing stimulus at its policy meeting on September 17-18, unless U.S. payroll numbers due on Friday disappoint in a big way.
The dollar rose as high as 99.705 yen, near its August 2 peak of 99.955 yen, after having gained more than 1 percent on Monday. Traders said offers from Japanese exporters and option-related selling near 100 yen are likely to block the U.S. currency's advance for now.
"I expect the dollar to be supported amid expectations that the Federal Reserve will start tapering its quantitative easing," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.
The Australian dollar popped higher after the Reserve Bank of Australia kept interest rates on hold as expected while staying silent on the policy outlook. The currency last stood at 90.45 cents, up 0.6 percent on the day, pushing further above a three-year trough around $0.8848 plumbed last month.
(Additional reporting by Hideyuki Sano in TOKYO; editing by Stephen Nisbet)