* Euro/dollar hovers below 2-1/2-year high
* Broad dollar weakness lifts euro despite dovish-sounding ECB
* Euro’s gains vs yen more modest
* Dollar index hits lowest since Jan 2015 as US yields drop
By Shinichi Saoshiro
TOKYO, Sept 8 (Reuters) - The euro hovered below a 2-1/2-year high versus the dollar on Friday, as a policy meeting by the European Central Bank did little to support the beleaguered U.S. currency.
The ECB reaffirmed its ultra-easy policy stance on Thursday by retaining rates at record lows, even keeping the door open to increasing bond purchases if needed, despite the euro zone’s best economic run since the global financial crisis.
Asked when the central bank will decide on potential policy tapering, ECB President Mario Draghi said the bulk of these decisions will probably be taken in October, enough to give euro bulls optimism on the short term outlook for the single currency.
But Draghi also said the ECB must take into account the weakening of inflation owing to the strong euro, with the central bank having opted to lower some of its inflation projections to reflect a firming common currency.
“The euro was bought on mention of tapering possibly starting in October. But the ECB sounded rather dovish overall and the euro probably should have been sold in response, particularly with German bund yields having fallen,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
“But the euro still managed to gain thanks to the dollar’s underlying weakness. The dollar is under pressure from many fronts ranging from sluggish inflation, Trump risk and geopolitical concerns.”
The euro was up 0.05 percent at $1.2027. The common currency had risen about 0.8 percent overnight, pushing close to a 2-1/2-year peak of $1.2070 set on Aug. 29.
The euro’s gains against the yen were more modest. It was a shade lower at 130.360 yen after having advanced 0.2 percent overnight.
The dollar was little changed at 108.380 yen after dropping 0.7 percent overnight when it briefly touched a 10-month low of 108.050.
The dollar index against a basket of six major currencies was steady at 91.480. It dropped to 91.405 the previous day, its lowest since January 2015 and was on track for a 1.4 percent weekly loss.
The U.S. currency felt pressure as long-dated Treasury yields fell to 10-month lows as U.S. jobless claims data and worries about the impact of hurricanes Irma and Harvey on the world’s largest economy stoked safe-haven demand for government debt.
U.S. yields were further pressured by declines in German government bonds after the ECB lowered its inflation forecast.
The Australian dollar was 0.1 percent higher at $0.8055 after setting a five-week high of $0.8060 against the broadly weaker dollar.
The New Zealand dollar rose 0.2 percent to $0.7249. (Editing by Shri Navaratnam)