FOREX-Cautious optimism supports dollar ahead of ECB

* Dollar, euro flat as traders await Thursday ECB meeting
* Rate cuts expected, decision a harbinger for Fed, BoJ
* Tepid risk-on mood holds as bonds and yen sold

By Tom Westbrook
SINGAPORE, Sept 11 (Reuters) - Fragile investor confidence
supported the dollar and weakened the yen on Wednesday but
currency markets kept to tight ranges ahead of series of major
central bank meetings over the next week.
Investor focus for now is centred on the European Central
Bank's meeting on Thursday, which is expected to push interest
rates even further into negative territory.
The ECB could set the tone for upcoming rate-setting
decisions by the U.S. Federal Reserve and the Bank of Japan next
week, and for the broader global risk appetite.
For now, a cautious risk-on mood has prevailed after
political crises that had hobbled markets, from Britain to Hong
Kong, abated, taking the shine off safe-haven assets.
Bonds slid overnight and the yen hit 107.65 per dollar, its
lowest since Aug. 1.
Overhanging the relief buying, however, are signs of a
slowdown in global demand, which have offset recent positive
developments in U.S.-China trade negotiations.
The euro EUR=EBS , which has shed 3% since June, was flat
at $1.1047. The dollar was flat against the Australian dollar
AUD=D3 at $0.6860 and steady on the yen JPY=EBS and the New
Zealand dollar NZD=D3 .
"Expect a quiet day of trading, with some support of risk,
as a broader cyclical rotation continues," Australia and New
Zealand Banking Group analysts said in a note.
"Speculation over whether the ECB will enact a new QE
programme on Thursday continues to ebb and flow."
ECB policymakers are leaning toward a package that includes
a rate cut, a pledge to keep rates low for longer and
compensation for banks over the side-effects of negative rates,
five sources familiar with the discussion said last week.
On the other hand, concerns have been building that global
central banks are reaching the limits of their stimulus options,
especially those with negative interest rates and sub-zero
long-term sovereign bond yields.
"Given the chance that the ECB fails to match market
expectations for easing policy, the balance of risks favours
higher EUR/USD and European FX outperformance," ING forex
strategists said in an overnight note.
Much of the positive mood in recent days has been driven by
optimism that a high-level meeting of U.S. and Chinese
negotiators at Washington next month can deliver some sort of
trade-war circuit breaker.
That was tamped down somewhat by White House trade advisor
Peter Navarro on Tuesday, when he urged patience about resolving
the two-year trade dispute between the world's two largest
economies and said to "let the process take its course."
But the prospect of a breakthrough stoked appetite for Asian
currencies such as the trade-exposed South Korean won KRW= ,
which drifted higher in Asian trading hours and to around
1189.50 per dollar, close to its highest since Aug. 2.
The yen, already under pressure as investors spurned safe
havens, was further sold overnight after Reuters reported BOJ
policymakers are more open to discussing the possibility of
expanding stimulus at their board meeting on Sept. 18-19.
And the pound has held on to last week's gains after British
parliament passed a law compelling Prime Minister Boris Johnson
to seek a delay to the Oct. 31 date for leaving the European
Union. Sterling last traded at $1.2353.