Euro rebound boosted by ECB comments on ending stimulus

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The euro rose to a nearly two-week high against the dollar on Wednesday after officials said the European Central Bank could wind down its stimulus program by the end of the year, as inflation has risen to its target.

Europe's common currency was on track to post its largest weekly gain versus the dollar since mid-February.

Having revived growth with an unprecedented 2.55 trillion euro ($2.99 trillion) bond purchase program, the ECB has been debating whether to end the purchases this year as the threat of deflation has passed and the bloc is on its best growth run in a decade.

Many traders expected the central bank to remain cautious at its June 14 policy meeting, given the uncertainty caused by a political crisis in Italy.

But ECB chief economist Peter Praet said on Wednesday the central bank would next week debate whether to unwind bond purchases gradually.

Germany's central bank head said market expectations for an end to bond-buying this year were plausible.

"The notion that the ECB could end stimulus sooner rather than later is a boon for the euro as it suggests an earlier arrival of an eventual rate hike from rock-bottom levels," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Praet's comments pushed the euro to $1.1796 (EUR=), the highest since May 22, and it also hit a more-than-one-week high of 1.1640 francs versus the safe-haven Swiss franc (EURCHF=).

"A breach of the $1.18 barrier will attract more euro bulls," said Viash Sreemuntoo, corporate trader at XE.

As well as boosting the euro, analysts said the comments would introduce heightened volatility in the options markets over the ECB meeting.

"Markets have already factored in a U.S. rate hike; that means the ECB is the most likely trigger for heightened volatility and I'm expecting to see that as we head into the meeting," said Ulrich Leuchtmann, head of FX strategy at Commerzbank (DE:CBKG).

The euro's rise put pressure on the U.S. dollar index (DXY), which measures the greenback versus a basket of six major currencies. The index fell 0.4 percent to 93.518.

The ECB comments followed a speech by Italy's new Prime Minister Giuseppe Conte, whose promise of radical change had a mixed impact on the euro.

"The Italians have a government and it is doing what it said it would do," said John Taylor, president and founder of research firm Taylor Global Vision in New York.

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"In itself that should be normal, but in this case it is shocking to the idea of Europe as it has be constructed by Brussels, the German government, and the ECB/Bundesbank," he added.