Euro holds gains as ECB rates unchanged

LONDON Thu Dec 3, 2009 9:13am EST

A sign for the Bank of America is seen outside a branch in Vienna, Virginia, October 16, 2009. REUTERS/Larry Downing

A sign for the Bank of America is seen outside a branch in Vienna, Virginia, October 16, 2009.

Credit: Reuters/Larry Downing

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LONDON (Reuters) - The euro held earlier gains against the dollar on Thursday after the European Central Bank left interest rates steady, as expected.

Traders are focusing on what ECB President Jean-Claude Trichet will say about scaling back the central bank's emergency lending measures. The ECB chief has dropped a number of hints that this month's handout of one-year loans would be the last.

Also in focus are the ECB's new staff forecasts, which are expected to show a solid upward revision to economic growth next year, but for the inflation outlook to remain subdued through the following year.

By 1253 GMT, the euro was up half of a percent at $1.5120, near the day's high around $1.5130 and within sight of a 16-month high of $1.5145.

Analysts say Trichet has to walk a fine line, as any hints of a rate rise would prompt traders to bid up the euro, especially as the U.S. Federal Reserve has said it would keep rates low for an extended time.

"A more hawkish tone would lead to an even stronger euro, so the ECB would likely want to have as little impact on the euro as possible," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

On the 12-month tender, there had been some speculation the ECB may index the 12-month rate or add a spread, which would be euro positive, analysts at RBC Capital markets said.

Another possibility is a cut in the frequency of 3-month and 6-month funding operations which would be moderately euro positive, they said.

The ECB kept its main interest rate on hold at a record low of 1 percent for the seventh month running. It also kept its overnight deposit rate, which acts as a floor for money markets, at 0.25 percent and left its marginal lending rate at 1.75 percent.

YEN FALTERS

The euro gained sharply against the yen, rising 1.0 percent on the day to 132.92 yen.

The yen has been on the decline after the Bank of Japan decided to provide new three-month funding at a fixed rate to combat deflation, in an emergency policy meeting on Wednesday.

BOJ Governor Masaaki Shirakawa said the central bank does not target foreign exchange for monetary policy but "if the bank's easy stance becomes widely known in markets, it will have certain effects on the currency market in the long run."

The dollar pulled further away from a 14-year low of 84.82 yen on reports Japan's top Finance Ministry official for currencies met U.S. Treasury officials earlier in the week, increasing speculation Tokyo might act to slow the yen's rise.

The finance ministry controls currency policy in Japan; the BOJ merely acts as its agent in the market.

Meanwhile, the dollar fell broadly on renewed risk appetite after Bank of America (BAC.N) said it would repay U.S. government bailout money.

The dollar index .DXY, which measures the greenback's performance against a currency basket, was down 0.3 percent.

A rise in European shares .FTEU3 and oil prices boosted demand for risk, while gold hit a record high for the third straight session.

This helped to boost higher-yielding, commodity-based currencies including the Australian and New Zealand dollars, which both rose 0.5 percent on the day.

Traders will also watch Fed Chairman Ben Bernanke's reconfirmation hearing later in the day.

(Additional reporting by Naomi Tajitsu; Editing by Nigel Stephenson)

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