FOREX-Euro slips to 1-1/2 month lows versus dollar, yen choppy
* Euro/dollar implied vols rise as spot drops
* Yen turns volatile on ballistic "objects" media report
* Aussie dollar jumps after RBA holds rates steady
By Anirban Nag
LONDON, Sept 3 (Reuters) - The euro fell to a 1-1/2 month low against a firmer dollar on Tuesday, weighed by expectations that the European Central Bank will reiterate its pledge to keep interest rates low to support a nascent recovery.
The safe-haven yen rose briefly on a media report that Russian radar detected two ballistic 'objects' that were fired towards the eastern Mediterranean. But it gave up those gains after investors realised it was not a missile strike on the Syrian capital, Damascus. Later, Israel said it carried out a joint missile test with the United States.
The dollar regained poise helped by a rise in U.S. yields. The interest rate-sensitive 2-year Treasury note yield was trading at 0.42 percent, its highest since July 2011. Investors are betting the Federal Reserve may start withdrawing stimulus, perhaps as early as this month, especially if the U.S. jobs market shows more signs of improvement.
The euro fell to $1.31605 on trading platform EBS, its lowest level since July 22 and was last trading lower on the day at $1.3180. Its weakness saw the dollar index gain 0.25 percent to 82.281, near its highest level in a month.
"Investors do not want to be long euros heading into the ECB meeting this Thursday," said Geoffrey Yu, currency strategist at UBS. "We haven't heard for a while from (President Mario) Draghi. We expect him to say conditions remain soft despite an improvement in the data and pledge to keep rates low."
Reflecting investor nervousness, one-month euro/dollar implied volatility, a gauge of expected price swings and derived from option prices, has risen to 1-1/2 month highs of around 8.6 percent.
The one-month risk reversals are also showing an increasing bias for euro puts/dollar calls, or bets the single currency will weaken. The risk reversals were trading 1.3 vols in favour of euro puts, up from around 1 just a week ago.
US DATA, FED
While the ECB is expected to keep monetary policy loose, traders expect the Fed to start reducing stimulus at its policy meeting on Sept. 17-18, unless U.S. payroll numbers due on Friday disappoint in a big way.
"The dollar is gaining a stronger grip as financial markets return to more normal volumes and Friday's U.S. labour report approaches - seen by many as crucial in determining if Fed tapering will begin," Tom Levinson, currency strategist at ING said in a note.
On Tuesday, the focus will be on the August ISM manufacturing PMI survey.
The dollar rose as high as 99.705 yen, near its Aug. 2 peak of 99.955 yen, after having gained more than 1 percent on Monday. It was last trading at 99.40 yen, recovering from a low of 99.165 yen struck after the reports from the Mediterranean.
The Australian dollar rose after the Reserve Bank of Australia kept interest rates on hold as expected while staying silent on the policy outlook. The currency last stood at $0.9035 cents, up 0.7 percent on the day.