* Markets happy to hold euros before ECB meeting next week
* New Zealand dollar plunges after surprise election outcome
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Oct 19 (Reuters) - The euro climbed to a one-week high on Thursday as investors shrugged off political uncertainty emerging from Spain before a central bank meeting next week where policymakers are expected to reveal plans to unwind their multi-year stimulus policies.
The single currency rose 0.4 percent to $1.1837 to its highest level since last Friday.
“I don’t think that there’s a transmission mechanism from Spanish assets to the euro so much,” said Stephen Gallo, European head of FX strategy at BMO Financial Group in London.
“If the ECB weren’t involved in the bonds markets and keeping credit spreads exceptionally tight I think it would be a different story.”
Spain’s central government said on Thursday it would suspend Catalonia’s autonomy and impose direct rule after the region’s leader threatened to go ahead with a formal declaration of independence if Madrid refused to hold talks.
While the euro has remained broadly impervious to political developments in recent weeks, investors said the single currency could run into some resistance around the $1.1880 line, the 50 percent trading range between September to October.
“The Catalonia thing is priced in now unless it blows up really badly and people seem to be happy going long euros before the ECB meeting next week,” aid John Marley, head of FX strategy at Infinity international, a currency risk management firm.
The European Central Bank will say on Oct. 26 it will start trimming its monthly asset purchases to 40 billion euros from 60 billion euros in January, according to a Reuters poll of economists.
Meanwhile, the dollar turned lower after hitting its highest in about two weeks against the yen with the market’s attention turning to who will next lead the Federal Reserve and this weekend’s Japanese election.
While growing market expectations of a new hawkish U.S. Federal Reserve Chair has propped up bond yields and the greenback this week, some large investors are sceptical on prospect of rising interest rates and more dollar gains.
“There is still a preference for low interest rates from the current administration and the dollar is broadly in line with longer term valuations,” said Isabelle Mateos y Lago, a managing director at Blackrock in London.
The two-year U.S. Treasury yield rose to its highest since November 2008 on Wednesday even though real yields on ten-year maturities have declined.
The New Zealand dollar was the other big mover in currency markets with the kiwi tanking nearly 2 percent after a surprise election outcome.
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 Saikat Chatterjee)