December 8, 2016 / 3:55 PM / 8 months ago

FOREX-Euro drops as ECB extends bond purchase timeline

* Euro drops on dovish ECB meeting

* Fed expected to raise rates next week (Adds market action, changes dateline, previous LONDON)

By Karen Brettell

NEW YORK, Dec 8 (Reuters) - The euro dropped over 1 percent on Thursday after the European Central Bank extended asset purchases until the end of next year and President Mario Draghi said cuts to the size of the program should not be viewed as tapering.

The ECB said it will reduce its asset buys to 60 billion euros from next April from the current 80 billion euros, and extend purchase by an extra nine months from March. It also reserved the right to increase the size of purchases once again.

"The ECB is going to stay in the markets," Draghi said in a press conference after the central bank's statement.

"They are still going to buy a lot," said Steven Englander, global head of foreign exchange strategy at Citigroup in New York. "The nine months is important because it pushes out the period over which you expect rates to be negative."

The euro had strengthened ahead of Thursday's decision. It peaked at $1.0875 in the first minute after the statement before turning lower.

It last traded at $1.0617, down 1.26 percent on the day.

"Make no mistake, the ECB has eased monetary policy with this move," said Mizuho strategist Peter Chatwell.

The Federal Reserve is widely expected to raise interest rates for the first time this year when it meets next week, though it is also seen as likely to take a cautious tone on the economy.

Traders will be watching for any indications of how many rate increases Fed officials expect in 2017, after Donald Trump's surprise election as U.S. President on Nov. 8 increased expectations of greater fiscal stimulus to boost economic growth.

"Last meeting we had seven participants looking for three or more hikes next year and I think it'll be a big deal if that seven goes to 10 or 11," said Citi's Englander.

That said, "they are also aware that rates are backing up and it might do damage to the housing market and the car auto market before any of this comes about, so I think they will be careful not to encourage it," Englander said.

The dollar index against a basket of six major currencies gained 0.90 percent to 101.13. Against the yen , the greenback increased 0.38 percent to 114.18. (Additional reporting by Abhinav Ramnarayan in London; Editing by Frances Kerry)

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