Dollar rebounds after recent sell-off as traders await ECB

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By Harry Robertson and Rae Wee

LONDON/SINGAPORE (Reuters) - The dollar rallied on Thursday, after earlier falling to a one-month low in choppy trading ahead of an expected rate hike from the European Central Bank (ECB).

The greenback has slid in recent days as investors have cheered signs that the U.S. Federal Reserve is considering slowing down its aggressive rate hikes in December. Yet the dollar reversed course on Thursday in what analysts said was a natural bounce after a steep decline.

The euro on Thursday peaked at a more than one-month high of $1.0094 before falling as the dollar strengthened.

It was last down 0.47% at $1.0032 ahead of the ECB's decision at 1215 GMT. The central bank is expected to raise its deposit rate by 75 basis points (bps) to 1.5%, a 13-year high. It is also likely to reel in a key subsidy to commercial banks.

"I think that a bit of profit-taking at this level is not unheard of," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. "Since Monday, the euro-dollar has gone up around 2.2%, so we've had quite a big move in the dollar over the last two days."

Against a basket of currencies, the dollar was up 0.54% to 110.14, having rebounded after falling to a one-month low of 109.53 earlier on Thursday. Sterling fell 0.59% to $1.1561.

Japan's yen rose more than 0.5% in early London trading to a high of 145.11 to the dollar.

Yet it also reversed gains later in the session to stand roughly flat at 146.34. Trading has been volatile after suspected interventions by the government to boost the ailing currency on Friday and Monday.

The ECB meeting could drive some volatility in the euro if the governing council discusses when to shrink its holdings of government bonds via quantitative tightening (QT), said Themos Fiotakis, head of FX strategy at Barclays (LON:BARC).

"QT in our view is bad for the euro, not good," Fiotakis said. It is likely to push up the borrowing costs of weaker economies such as Italy, "and that's generally bad for the euro," he said.

Markets are still expecting another 75 bps rate hike from the Fed next week, although many investors expect a smaller increase in December.

Housing data released this week, which showed that U.S. single-family home prices sank in August, provided evidence that the Fed's hikes are already slowing the economy.

Overnight, the Bank of Canada announced a smaller-than-expected interest rate hike of 50 bps. The move has made investors even more alert to signs that the Fed and ECB might be slowing down.

The Canadian dollar last traded 0.45% lower at 1.3615 per U.S. dollar.

The Aussie dollar fell 0.69% to $0.645, as a red-hot inflation print stoked pressure for more aggressive rate hikes by the Reserve Bank of Australia.