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Euro gains as ECB hints at exit strategy; yen weak

NEW YORK - The euro clung to gains against the U.S. dollar on Thursday after the European Central Bank hinted it would slowly start withdrawing emergency spending while the yen fell amid fears Japan may move to weaken its currency.

Though the ECB left interest rates at record lows, its president Jean-Claude Trichet said the next 12-month refinancing operation for banks would be the last. The bank also lifted its growth forecast for 2010. ¨ûID:nECBNEWS¨ü

That sent the euro near a 16-month high around $1.5140 and pushed it to its highest level against the yen in a week. But it pared those gains after Trichet said interest rates remain appropriate and did not offer a timetable for winding down the ECB¡¯s ultra-loose monetary policy.

Such policies tend to undermine a currency¡¯s value because they increase money supply and risk higher inflation.

¡°He hinted that they¡¯ll do something about an exit policy, so the first knee-jerk reaction was euro positive, but he¡¯s not ready to endorse a full exit quite yet, so it¡¯s really neither overly supportive of nor detrimental to the euro,¡± said Boris Schlossberg, head of research at GFT Forex in New York.

The euro was last at $1.5079 , up 0.3 percent. It rose 1 percent to 132.97 yen .

Data showing U.S. manufacturing contracted in November after growing modestly the prior month raised doubt about the strength of U.S. recovery and undermined risk appetite, weakening stocks and trimming euro gains. ¨ûID:nN0394160¨ü

The yen was under pressure for the second straight day after the Bank of Japan said earlier this week it would provide new three-month funding to banks to combat deflation and after top officials warned that the currency had grown too strong.

The dollar was up 0.8 percent at 88.18 yen , off a 14-year low of of 84.82 yen hit last week.

BOJ Governor Masaaki Shirakawa said the central bank does not target foreign exchange for monetary policy but ¡°if the bank¡¯s easy stance becomes widely known in markets, it will have certain effects on the currency market in the long run.¡±

A report that Japan may consider selling some reserves to fund stimulus spending at home did not appear to have much effect on the yen¡¯s moves Thursday, analysts said.

Elsewhere, sterling fell 0.3 percent to $1.6585 , the dollar rose 0.5 percent to 1.0570 Canadian dollars and fell 0.1 percent to 0.9992 Swiss francs .

In Europe and the United States, markets are focused on when authorities will start withdrawing stimulus spending. Analysts said Trichet had to walk a thin line, as any hint of a rate rise would prompt traders to bid up the euro, especially as the U.S. Federal Reserve has said it would keep its own rates low for an extended time.

¡°He¡¯s saying the outlook for economic growth is still uncertain, which means he¡¯s not overly confident, and it seems that is capping the euro gains,¡± said Hidetoshi Yanagihara, senior FX trader at Mizuho Corporate Bank in New York.

Fed Chairman Ben Bernanke will likely be grilled on his intentions regarding monetary policy and his performance atop the U.S. central bank during renomination hearings before Congress.

In his opening remarks, Bernanke said the Fed¡¯s forceful actions thus far have prevented a devastating financial crisis from turning into something even worse. ¨ûID:nWEQ003631¨ü

Earlier, news that Bank of America would repay bailout funds to the U.S. government boosted risk appetite and suggested improvement in the banking sector. That aided stocks and higher-yielding currencies at the expense of the dollar.