* Eyes on euro, ECB meeting
* Dollar index near multi-week lows as yields stall
* Bank of Canada puts tapering back in spotlight
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E
By Ritvik Carvalho
LONDON, April 22 (Reuters) - The euro edged higher before a
European Central Bank meeting later on Thursday, where any
positive comments about the economic outlook or hints of
tapering bond purchases are expected to send the common currency
racing higher.
The ECB is not expected to change policy when it meets later
on Thursday, but analysts say this meeting will set the stage
for June, when policymakers have to decide whether to slow its
bond buying. Dutch central banker Klaas Knot has already said tapering is
possible, and the euro could resume its rise against the dollar
on any signs reducing bond purchases is gaining more support
within the ECB, analysts said.
The euro EUR=D3 was quoted at $1.2033, up 0.1% on the day
and not far from its strongest since March 3. The common
currency has gained as much as 3% against the dollar since the
start of April.
"We expect the European Central Bank meeting today to have a
limited impact on the euro," said strategists at ING in a
research note.
"With the ECB already announcing the front-loading of PEPP
purchases in March and the trade-weighted euro being below its
multi-quarter average (i.e. since the ECB started its verbal
intervention last summer), there is a little need for the ECB to
surprise today or lean against the common currency."
The euro's gains weighed on the dollar, which eased to
107.87 yen JPY=D3 , close to a seven-week low.
The dollar was near multi-week lows against most major
currencies as fading gains in U.S. Treasury yields reduced its
interest rate advantage.
Sentiment toward the dollar has weakened as last month's
spike in Treasury yields reverses course, but some analysts say
the outlook over the longer term remains positive due to a
strong U.S. economy and an improved coronavirus vaccination
programme.
The British pound GBP=D3 bought $1.3938, up 0.1% on the
day.
The onshore yuan CNY=CFXS rose to 6.4820 per dollar to
reach its strongest level since March 12.
On Wednesday a closely watched auction of U.S. 20-year
Treasuries drew strong demand, which helped the fixed income
market regain its composure and put a cap on yields.
Last month, Treasury yields spiked to their highest in more
than a year due to worries about accelerating inflation, which
prompted dollar bulls to pile into the currency.
However, this trade has started to unwind this month as
yields reversed course, and investors will now look to the U.S.
Federal Reserve's meeting next week for new trading cues.
"Looking ahead, we see a strategically high risk that US
real rates will make a comeback from their recent consolidation
supported by a recovery in US nominal variables," said Lars
Sparresø Merklin, senior analyst at Danske Bank.
"With euro/dollar at $1.20 and our strategic view on real
dollar yields, we see the surprise potential as being pro-U.S.,
towards a hawkish Fed and stronger USD."
Monetary policy has drawn renewed attention after the Bank
of Canada signalled that it could start raising interest rates
in late 2022 after it cut the pace of bond purchases, making it
the first Group of Seven central bank to move towards
withdrawing stimulus. The Canadian dollar CAD= , which surged to a six-week high
on Wednesday, was last quoted at 1.2494 against its U.S.
counterpart, flat on the day.
The Australian AUD=D3 and New Zealand dollars NZD=D3
traded near one-month highs against the U.S. dollar, supported
by speculation that their central banks are more likely to
follow Canada's example due to an improving economic outlook.
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