Euro, bond yields dip as looser ECB policy eyed

The euro hit its lowest level against the dollar in nearly a year and euro zone government bond yields fell to record lows on Tuesday on expectations the European Central Bank might ease monetary policy as soon as next week.

The single currency fell as low as $1.3178 in Asian trade, its weakest since Sept. 9, before recovering slightly, in response to ECB chief Mario Draghi’s comments last week that he was ready to use all available tools if euro zone inflation fell further. Draghi also called for fiscal policy to play a greater role in reviving the economy.

The next ECB policy meeting is on Sept. 4. Preliminary euro zone data due on Friday are forecast to show annual inflation was just 0.3 percent this month, down from 0.4 percent in July, well below the ECB’s target of just under 2 percent.

“If it is confirmed over the next few weeks and months that inflation goes closer to zero, they (the ECB) will have to buy everything they can and inflate the balance sheet,” said Frederik Ducrozet, senior euro zone economist at Credit Agricole. “There is no other option.”

European shares rose, extending gain made on Monday in trained thinned by a UK market holiday. The FTSEurofirst 300 index .FTEU3 was last up 0.4 percent at 1,371.34.

The prospect of looser ECB policy and possibly further stimulus helped lift shares in Asia and Wall Street. The S&P 500 .SPX topped 2,000 for the first time and on Monday looked set to open higher. S&P 500 EMini futures ESc1 were up 0.2 percent.

Emerging-market stocks .MSCIEF hit a three-year high on expectations of inflows if the ECB eases policy. However, Russian shares fell before talks in Belarus, where presidents Vladimir Putin of Russia and Petro Poroshenko of Ukraine were meeting in talks over conflict in eastern Ukraine.

The dollar index .DXY, which measures the greenback against a currency basket, hit a one-year high in New York before falling back to trade less than 0.1 percent lower.

The euro EUR= was last at $1.3196, up 0.1 percent on the day. The yen JPY= rose a similar amount at 103.90 to the dollar.

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