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* ECB may start asset purchases or cut rates further
* Sterling spikes after Bank of England report, UK jobs data
* Yen near two-month low vs dollar on higher U.S. bond yields
NEW YORK, Nov 13 The dollar rose against the euro on Wednesday after news the European Central Bank could start to buy assets or cut its deposit rate into negative territory to trigger a rise in inflation to the central bank's target.
Executive Board member Peter Praet was quoted as saying in the Wall Street Journal that "the balance-sheet capacity of the central bank can also be used (to fulfil the inflation mandate)." That included outright asset purchases, he said.
Praet also said the ECB still had room to move on interest rates, even after cutting the main rate to a record low of 0.25 percent last week and keeping the deposit rate at zero.
"A good amount of the bounce (in the dollar) came out on the news" from Europe, said Andrew Dilz, foreign currency trader at Tempus Inc in Washington, "If we get to a close of $1.3380, then there is more room for dollar strength."
The euro was last down 0.1 percent at $1.3419 after going as low as $1.3389. It was still holding above the two-month low of $1.3295 struck after last Thursday's ECB rate cut.
The dollar struggled against most other major currencies with attention turning to the Senate confirmation hearing for incoming Federal Reserve chair Janet Yellen on Thursday.
Most investors expect Yellen to be dovish and continue the policies of current Federal Reserve Chairman Ben Bernanke but investors are still waiting to hear what message she conveys during confirmation procedures.
Atlanta Fed President Dennis Lockhart, seen as a centrist in policy terms, said on Tuesday a cut in the Fed's bond-buying operations remained a possibility in December.
At the same time, last month's U.S. government shutdown may undermine the reliability of economic data through December, Lockhart added. That could provide another reason not to expect policy action when the Fed holds its next meeting, on Dec. 17-18.
In the absence of any U.S. data, investors are hoping for some hints of what Yellen may bring.
"You could hear a pin drop in this market," said Michael Woolfolk, global market strategist at BNY Mellon in New York.
Sterling rallied after the Bank of England said there was a chance British unemployment could fall to 7 percent in the fourth quarter of 2014. Data published earlier on Wednesday showed Britain's unemployment rate fell to 7.6 percent in the three months to September.
That kept alive speculation the UK central bank might raise interest rates far earlier than it has flagged so far, highlighting a divergence between Britain's monetary policy path and that of both the European Central Bank and the Bank of Japan.
"The tone struck in the quarterly inflation report was that of a more optimistic BoE, with Governor (Mark) Carney even suggesting that it's hard to ignore that the 'glass is half full'," said Chris Vecchio, currency analyst at DailyFX.com in New York.
Sterling rose to $1.6001, rebounding from Tuesday's two-month low of $1.5852 after the better-than-expected UK jobs report and a raised growth forecast from the central bank. Sterling was last up 0.6 percent at $1.5995.
The dollar eased 0.2 percent to 99.40 yen, not far from a two-month high of 99.79 yen struck on Tuesday. The U.S. currency is up about 0.4 percent so far this week against the yen, having drawn strength from rising U.S. bond yields.
Higher U.S. bond yields tend to favor the dollar by making dollar-denominated debt more attractive to bond investors. The 10-year U.S. yield has risen since last Friday's strong U.S. jobs data for October.