Euro on shaky ground as ECB easing talk mounts, stocks up

By Dhara Ranasinghe

LONDON (Reuters) - The euro slipped back towards seven-month lows, bond yields fell and European shares gained on Thursday as talk of aggressive stimulus from the European Central Bank next week grows.

European shares rose 0.25 percent in early trade, while MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 percent. Japan's benchmark stock index also closed 0.5 percent higher.

The euro remained under pressure a day after euro zone central bank officials told Reuters that they are considering options such as staggered charges on banks hoarding cash and buying more debt ahead of next week's ECB meeting.

That fueled talk that the central bank is getting ready for aggressive measures to lift inflation and economic growth in the 19-member euro zone.

"Ultimately, I think the ECB will be aggressive and that divergence in policy with the United States must imply a weaker euro," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

"The question now is how far can we go, and as the Fed tightens, euro/dollar parity is looking likely by the second quarter of next year."

The euro fell about 0.2 percent to $1.0609, having tumbled on Wednesday to $1.0565, its lowest level since mid-April. Against the yen, it was trading 0.2 percent lower at 130 yen, having hit a 7-month low of 129.77 on Wednesday.

Overall market activity was expected to be thin due to the Thanksgiving holiday in the United States.

Speculation about further easing by the ECB comes as upbeat U.S. economic data reinforces a view that the U.S. Federal Reserve will soon lift interest rates for the first time in almost a decade.

Short-term euro zone interest rates fell to record lows on Thursday as markets interpreted an ECB debate about two-tier deposit rates as signaling the intention for an aggressive cut.

ECB easing expectations also pushed German five-year government bond yields to a new record low of -0.196 percent, while two-year yields hovered just above lows of -0.418 percent.

Expectations for a divergence in monetary policy meanwhile has pushed the gap between short-dated bond yields in the U.S. and Germany to their widest since 2006, underpinning the dollar.

The dollar index, which measures the dollar's value against a basket of six other major currencies, scaled an 8-1/2-month high of 100.170 overnight. It last stood at 99.863.

The firmer dollar and concerns about surplus supply pushed crude oil prices lower.

Brent crude oil futures lost 34 cents, or 0.95 percent, to $45.73 a barrel.

U.S. crude's West Texas Intermediate (WTI) futures retreated 0.25 percent to $42.94 a barrel after rising to $43.30 during the Asian session.

Spot gold was little changed at $1,071.65 an ounce, hovering close to its lowest in nearly six years on the back of a firmer dollar and expectations for higher U.S. interest rates.

"We are keeping an eye on the dollar as a possible catalyst (for gold)," ScotiaMocatta analysts said in a note.

(Editing by Dominic Evans)