* Euro dips after ECB policy decision
* Sterling trades near 2-week high
* Polls suggest PM May’s Conservatives will win majority
* Dollar falters vs yen, languishes near 7-week lows
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh#
* Graphic on UK election: tmsnrt.rs/2q7tC48
By Ritvik Carvalho
LONDON, June 8 (Reuters) - The euro dipped against the dollar on Thursday after the European Central Bank kept interest rates on hold, while sterling eased from a two-week high as markets priced in an election victory for Britain’s Conservative Party.
The ECB dropped a reference to further interest rate cuts, while repeating it expects rates to remain at record lows for an extended period and well beyond its asset purchase programme.
The euro dropped to $1.12165 from $1.1241 following the statement.
“They have omitted the guidance that interest rates might be cut, but they have kept all their other easing measures in place and the comment that quantitative easing could be extended if needed,” Sonja Marten, senior FX strategist at DZ Bank in Frankfurt, said. “Maybe the market was looking for a more hawkish signal.”
The euro has risen 10 percent against the dollar in the past five months, partly due to the greenback’s weakness, but also on the view that rising inflation would prompt the ECB to raise interest rates in early 2018.
But reports on Wednesday that the ECB would cut its inflation forecasts have dampened expectations of the bank’s language veering towards a pullback of its stimulus programme, also known as quantitative easing (QE), later this year.
Sterling traded at $1.2942, coming off a peak of $1.2978 in morning European trade, its highest level since May 25.
A final opinion poll published on Thursday as Britons vote in a national election showed Prime Minister Theresa May’s Conservatives widening their lead to 8 percentage points from 5 points, suggesting her gamble to call the vote to strengthen her position in Brexit negotiations will pay off.
“Confirmation (of investors’ expectations of a Tory win) may support the pound against the euro and the dollar but it does feel like some positives might be already baked into the price,” said Valentin Marinov, head of FX strategy at Credit Agricole in London.
“That also means that any potential disappointment, i.e. a Tory majority being eroded as a result of the snap election or a hung parliament could be pretty damaging for the pound.”
The dollar recovered some of its losses against the safe-haven yen, up 0.3 percent to 110.11 yen per dollar . The index that measures its broader strength was up 0.2 percent at 96.931.
Investors will closely monitor U.S. Senate testimony by former FBI Director James Comey later on Thursday, worried this could dampen already flagging momentum for President Trump’s agenda of rolling back regulation and overhauling the tax code.
In written testimony released on Wednesday, Comey - who was abruptly fired by Trump in May - said that the president asked him to drop an investigation of former National Security Adviser Michael Flynn as part of a probe into Russia’s alleged meddling in the 2016 presidential election.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Ritvik Carvalho; additional reporting by Masayuki Kitano and John Geddie; editing by Alexander Smith)