* Euro touches 2-year low ahead of ECB meeting
* Dollar sets 7-year high vs yen, edges close to 120 yen
* Australian dollar touches fresh 4-year low (Updates levels)
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, Dec 4 (Reuters) - The euro hit a two-year low on Thursday, finding few friends in a market that is wagering the European Central Bank will be forced to inject even more stimulus into the sputtering euro zone economy.
While a full-blown quantitative easing programme after Thursday’s policy review is unlikely, some believe the ECB may lay the groundwork for such a move early next year.
Keeping pressure on the ECB to do more, a survey on Wednesday showed euro zone business activity grew less than thought last month, suggesting the bloc’s economy may be on the verge of contracting again.
The euro eased 0.1 percent to $1.2295, slipping below $1.2300 for the first time since August 2012. The euro has clearly broken through the bottom of a $1.2360/1.2600 range seen in the past three weeks, a bearish sign for the currency.
Yet traders said the ECB must meet the market’s already very dovish expectations or risk sparking a short-covering rally that some analysts said could see the euro squeeze back above $1.2600.
“We think the Council is more likely waiting to see the TLTRO2 uptake on Dec. 11, before making any decision on expanding its asset purchase programmes, which could potentially occur in Q1 2015,” said Greg Moore, strategist at RBC Capital Markets, referring to the ECB’s targeted-liquidity operations.
The dollar touched another seven-year high against the yen, rising as far as 119.98 yen on trading platform EBS. The dollar last traded at 119.95 yen, up 0.1 percent on the day.
The dollar remains well supported against the yen, helped by the U.S. economy’s outperformance, said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
Japanese media projections showing that Prime Minister Shinzo Abe’s coalition may keep its two-thirds majority in the lower house of parliament in general elections on Dec. 14 were also “mildly supportive” for the dollar versus the yen, Henderson said.
Abe is seeking a fresh mandate for “Abenomics”, his push to revive the economy through a mix of hyper-easy monetary policy, government spending and reforms.
“It would be much more of a threat to dollar/yen if the polls had turned down against him materially because that in turn would be a threat to the macro economic policies that he has pursued,” Henderson said.
The dollar set a fresh 5-1/2 year high against a basket of currencies at 89.044, its highest level since March 2009.
The Australian dollar fell 0.5 percent to $0.8366, having fallen to as low as $0.8358 earlier on Thursday, its lowest level since mid-2010.
The Aussie dollar bounced briefly after Australian retail sales data came in better than expected but later sagged back down.
Data on Wednesday showing that Australia’s economic growth unexpectedly slowed last quarter had prompted markets to price in more chances of an interest rate cut by the Reserve Bank of Australia, dampening sentiment toward the Aussie dollar. (Additional reporting by Cecile Lefort in Sydney; Editing by Kim Coghill)