* Euro holds firm ahead of ECB policy decision
* ECB expected to announce gradual withdrawal of stimulus
* Dollar eases vs yen, down from 3-month highs
By Masayuki Kitano
SINGAPORE, Oct 26 (Reuters) - The euro inched higher on Thursday, as investors awaited details of the European Central Bank’s plans for scaling back its bond-buying stimulus programme, while the dollar took a breather after its recent rally.
The euro inched up 0.1 percent to $1.1819, having edged up from a two-week low of $1.1725 that had been set on Monday.
The ECB is all but certain to cut back on its bond-buying stimulus on Thursday, taking its biggest step yet in unwinding years of loose monetary policy.
Since inflation remains low, however, any reduction in the monthly amount of asset purchases is expected to come with a lengthy extension of the programme.
Still, there seems to be some caution toward the risk that the ECB’s policy announcement could give a lift to the euro, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.
“The market may be hedging for a hawkish surprise,” Innes said, referring to the firmness in the euro in recent trading sessions.
The dollar, meanwhile, took a breather after having rallied over the past week on optimism over the prospects for U.S. tax reforms, as well as speculation that the next chair of the U.S. Federal Reserve could steer policy in a more hawkish direction.
The dollar’s index against a basket of six major currencies, stood at 93.609, having retreated from Wednesday’s intraday high of 94.008.
Despite Wednesday’s pullback, the dollar index has gained about 0.6 percent from a trough hit a week ago, buoyed by hopes for a tax-cut plan and in the aftermath of reports that Stanford University economist John Taylor impressed President Donald Trump in his interview for the Fed’s top post.
Taylor favours a rule-based approach to setting interest rates and is seen as someone who may put the Fed on a path of faster rate hikes compared with Fed Chair Janet Yellen, whose term expires next February.
Trump’s other possible nominees to head the Fed include Yellen, Fed Governor Jerome Powell, his economic adviser Gary Cohn and former Fed Governor Kevin Warsh.
Trump is expected to announce his Fed chair candidate before his Asian trip in early November.
Against the yen, the dollar eased 0.1 percent to 113.60 yen , down from Wednesday’s three-month high of 114.245 yen.
A slight pull-back in U.S. Treasury yields helped temper the dollar’s momentum. The benchmark 10-year U.S. Treasury yield last stood near 2.432 percent, having slipped from Wednesday’s seven-month peak at 2.475 percent.
Among other major currencies, sterling held steady at $1.3269, after having climbed 1 percent on Wednesday, as stronger-than-expected U.K. growth data cemented expectations the Bank of England will raise interest rates next week. (Reporting by Masayuki Kitano; Editing by Simon Cameron-Moore)