Euro, bond yields climb as Draghi flags tightening talks in autumn

LONDON (Reuters) - The euro rose towards a 14-month peak against the dollar on Thursday and European bond yields hit highs for the day after European Central Bank chief Mario Draghi said policymakers would discuss possible changes to its bond-buying scheme in the autumn.

Though Draghi said that no date had been set for discussing any changes to the programme and that ECB rate-setters had been unanimous in their decision not to change their guidance an monetary policy, investors reckoned discussions in the autumn would lead to monetary tightening next year.

The euro climbed as high as $1.1571 as Draghi spoke, just a whisker away from 14-month highs of $1.1583 hit earlier in the week and leaving it up as much as half a percent on the day.

"Draghi did his best this afternoon to cap the euro, failing quite spectacularly," wrote Alex Lydall, head of dealing at corporate brokerage Foenix Partners.

Against sterling, the euro climbed 0.8 percent to an eight-day high of 89.20 pence.

"I think a positive outlook of the economy and expectations of stimulus withdrawal in the autumn and perhaps confirmation of the fact that we will have more explicit tightening then is driving the euro and bond yields higher," said Alexandra Russell-Oliver, FX strategist at Caxton FX in London said.

Markets still expect the ECB to raise rates next year, though they now bet that a hike could come later than initially anticipated.

Euro zone money markets price in roughly a 70 percent chance of a 10 basis point hike in rates by next July, having fully priced in a move a week ago. A rise by October is fully priced in by markets.

"In all probability tapering will occur as we head into 2018 and we have seen no substantive challenge to that expectation in today's meeting. Hence the currency has received some support," Richard McGuire, a senior strategist at Rabobank said.

McGuire added that the euro was rising probably due to the fact that Draghi noted the single currency's appreciation had received attention but "provided no push-back to this strengthening despite having the perfect opportunity to do so".

Euro zone stocks climbed back up 0.6 percent as the euro gave back some gains. Euro zone banks gained as much as 1 percent and STOXX 600 banks turned positive again. The pan-European index reversed losses to rise 0.2 percent.

(Reporting by London markets team; Editing by Hugh Lawson)