Euro supported by ECB policy plans, yen falls to 24-year low

By Samuel Indyk

LONDON (Reuters) - The euro rose on Tuesday, drawing support from the European Central Bank's plans to raise interest rates to contain inflation, while the yen slumped to a 24-year low as the Bank of Japan's ultra-loose monetary policy stance continued to weigh.

The euro was 0.4% firmer at $1.0554 after ECB Chief Economist Philip Lane said the ECB will raise interest rates by 25 basis points at its July meeting, but the size of its September hike is still to be decided, suggesting a larger 50 basis point hike could be on the cards.

Meanwhile, ECB policymaker Francois Villeroy de Galhau said the central bank's planned instrument against financial fragmentation must allow it to back up its commitment to defend the euro.

The ECB's communication efforts are having the desired effect on euro zone bond markets, which in turn is supporting the euro, according to Simon Harvey, Head of FX Analysis at Monex Europe.

"This reduces the financial stability risk in the euro zone and the single currency's integrity, thus reducing upside resistance for the currency pair," Harvey said.

Broadly higher risk sentiment across markets, with U.S. equity futures up almost 2% and most European equity indexes higher, also supported the euro.

"With a more constructive cross-asset backdrop today, we're just seeing that reduced upside resistance play out in euro-dollar as 1.06 comes back into focus," Harvey added.

Elsewhere, the yen fell over 0.5% to a 24-year low of 135.835 per dollar, continuing to weaken after the Bank of Japan on Friday dashed any mild expectations of a change in policy and renewed its commitment to ultra-easy monetary settings.

The dollar index, which tracks the greenback against six major peers including the euro and the yen, was down 0.2% at 104.23, with eyes on Federal Reserve Chair Jerome Powell's testimony to Congress, which kicks off on Wednesday.

"The next big dollar input will be when Fed Chair Jerome Powell delivers his semi-annual monetary policy testimony to the Senate - which judging from the latest FOMC meeting should be pretty hawkish and means that any dollar downside today is likely to be limited," ING analysts said in a note.

Two other Fed policymakers are due to make public remarks later on Tuesday, with traders watching their comments closely for clues about the interest rate trajectory.

The Australian dollar rose 0.1% after Reserve Bank of Australia governor Philip Lowe signalled a lot more policy tightening ahead, although he played down the chances of a super-sized 75 basis point rate hike.

Sterling ticked up 0.4% to $1.2294 ahead of Wednesday's inflation figures and as Bank of England Chief Economist Huw Pill said interest rates will need to rise further in the near future to tackle inflation.

Largest cryptocurrency bitcoin was up 3.5% at $1,274 as it continues its recovery from an 18-month low of $17,592 reached over the weekend.