December 8, 2016 / 5:18 AM / 8 months ago

FOREX-Euro edges higher, holds near 3-week high as focus shifts to ECB

4 Min Read

* Euro stays firm, trades near recent 3-week high

* Near-term focus on ECB policy meeting on Thursday

* Dollar nurses losses after U.S. bond yields slip

* Kiwi bolstered by risk appetite, upbeat RBNZ view

By Masayuki Kitano and Yuzuha Oka

SINGAPORE/TOKYO, Dec 8 (Reuters) - The euro edged up and traded near a three-week high against the dollar on Thursday ahead of a European Central Bank policy decision, as the greenback lost momentum from the recent pull-back in U.S. bond yields.

The euro has been the main focus for traders this week after Italian Prime Minister Matteo Renzi said he would resign after a stinging defeat in a referendum on constitutional reform.

After initially dropping on the referendum news, the euro rallied strongly on Monday and has since held below three-week highs against the dollar as investors wait on the ECB.

The ECB is expected to announce a six-month extension to its quantitative easing programme on Thursday, while keeping the size of asset purchases unchanged at 80 billion euros, according to a majority of economists polled by Reuters.

"Markets are already expecting the ECB to extend its quantitative easing beyond next March," said Yukio Ishizuki, FX strategist at Daiwa Securities in Tokyo.

"The euro is less likely to fall, because bets against the euro have piled up and investors have tended to buy back the currency after the Italian referendum," Ishizuki added.

The euro edged up 0.2 percent to $1.0776, trading within sight of Monday's peak of $1.0797, its highest level since Nov. 15.

On Monday, the euro had initially slumped to $1.0505, its lowest since March 2015 in a knee-jerk reaction to the outcome of the Italian referendum.

Emphasising abundant risk, including from forthcoming elections in Europe, ECB President Mario Draghi is expected to argue that premature tapering - or slowly ending - bond-buying could abort a still timid recovery, unravelling the impact of the purchasing programme.

Moody's changed its outlook on the country's bond rating to negative from stable, underscoring the financial risks that heavily indebted Italy faces, saying prospects for much-needed economic reform had diminished after Italians rejected Renzi's proposals to revise the constitution and streamline parliament.

While the market remains concerned about the risk of an early election being called in Italy, the immediate focus was on the ECB meeting, said Shinichiro Kadota, senior FX strategist for Barclays in Tokyo.

"I think the market will reassess the situation after seeing what comes out of the ECB," Kadota said.

The dollar index , which measures the greenback against a basket of six major currencies, stood at 100.02, back near a three-week low of 99.85 set on Monday.

The dollar has lost some momentum after U.S. bond yields declined from their recent peaks. The 10-year Treasury yield now at 2.345 percent, down from a 1-1/2 year high of 2.492 percent set on Dec. 1.

The dollar fell 0.3 percent to 113.41 yen.

Gains in equities and an improvement in risk appetite helped lift the New Zealand dollar, bolstered by upbeat comments on the economic outlook from the Reserve Bank of New Zealand.

The New Zealand dollar rose 0.6 percent to $0.7207. It touched a high of $0.7223 at one point, its strongest level in about a month.

There was limited market reaction to Chinese trade data, which showed that China's November dollar-denominated exports unexpectedly rose by 0.1 percent from a year earlier while imports expanded 6.7 percent.

The Australian dollar was up 0.2 percent on the day at $0.7495. (Reporting by Masayuki Kitano and Yuzuha Oka; Editing by Shri Navaratnam and Eric Meijer)

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