* Euro at highest since mid-March vs dollar
* ECB widely expected to expand emergency bond buying
* Aussie off 5-month high, shrugs off local retail sales
* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E
By Hideyuki Sano
TOKYO, June 4 (Reuters) - The euro held near multi-month highs against its peers on Thursday, on expectations the European Central Bank will expand its bond buying programme later in the day to shore up the coronavirus-stricken economy.
The euro’s strength helped to push the dollar’s index against a basket of key currencies to the lowest in nearly three months while optimism over the reopening of economies around the world also reduced demand for the dollar.
The euro stood at $1.1220, down slightly on the day after having risen to $1.1258 on Wednesday, its highest levels since mid-March and the seven straight session of gains.
Against the Japanese yen, the common currency rose to a 4-1/2-month high of 122.625 overnight and last stood at 122.21 yen.
It also fetched 1.0793 franc on the safe-haven Swiss currency, having risen to as high as 1.0820, its strongest since Jan. 14.
The European Central Bank is widely expected to increase the size of its 750 billion euro ($669 billion) Pandemic Emergency Purchase Programme (PEPP) as early as Thursday.
The ECB delivers its policy decision at 1145 GMT and ECB President Christine Lagarde holds a news conference at 1230 GMT.
The currency has been bolstered by hopes for European Union-wide fiscal support measures after Germany last month threw its weight behind the idea of a European Union recovery fund, breaking away from its long-held tradition to resist moves towards fiscal integration in the currency bloc.
“I suspect the market has already priced in an increase of about 500 billion in the PEPP and in the near term, there is risk of a correction,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
“The market could react positively if the ECB expands the target of its bond purchase or scraps its limit on each country. But in terms of the total size, it is hard to expect a positive surprise now,” he said.
The dollar index stood at 97.450, having fallen about 1% so far this week as broad improvement in risk sentiment, underpinned by reopening of economies globally, reduced the allure for the greenback.
On Wednesday, data showed that U.S. private payrolls fell less than expected in May, suggesting layoffs were abating as businesses reopen, though the overall economy’s recovery from the COVID-19 pandemic will be slow.
Optimism on economic re-openings and recovery continued to dominate the market despite social unrest in the United States and brewing diplomatic tensions between Washington and Beijing.
The safe-haven yen also weakened during much of this period, and was last trading at 108.96 yen, near a two-month low of 108.98 hit in U.S. trade previously.
Sterling was changing hands at $1.2576, near its strongest in more than a month, helped by signs that Britain might be willing to compromise on sticking points in Brexit negotiations with the European Union.
Britain is expected to indicate flexibility over fisheries and trade rules if the European Union agrees to lessen its demands regarding regulatory alignment and fishing access, the Times newspaper reported on Tuesday as a new round of talks kicks off.
The UK has until July 1 to ask for an extension to the current transition period, which ends in December.
The Australian dollar slipped slightly to $0.6895, consolidating after having hit a five-month high of $0.6982 on Wednesday.
The market took the record plunge in the country’s retail sales in its stride.
“The market’s sentiment is still risk-on. But I have the impression that, in some currencies, such as the Australian dollar, the rally is a bit over-heating,” said Hiroshi Morimatsu, director of forex at MUFG Bank. (Editing by Shri Navaratnam and Jacqueline Wong)