* Euro edges near 16-mth high vs dollar, ECB awaited
* Risk demand rises on BofA TARP payback announcement
* Yen slips, traders speculate possibility of intervention
(Updates prices, adds comment)
By Naomi Tajitsu
LONDON, Dec 3 (Reuters) - The euro rose on Thursday, closing
in on a 16-month high against the dollar on speculation the
European Central Bank may take the first steps in winding down
quantitative easing at a policy meeting later in the day.
The dollar slipped after Bank of America's announcement it
would repay bailout funds stoked risk demand while the yen
continued to struggle on speculation the Bank of Japan could
intervene to stem strength in the currency.
The ECB is widely expected to hold rates at a record low 1.0
percent at a policy meeting due to end at 1245 GMT.
Some in the market expect ECB President Jean-Claude Trichet
to say in a news conference after the meeting that this month's
offer of 1-year funds at rock-bottom rates will be the last in a
series of liquidity-boosting operations.
The market will also see whether Trichet will further
outline the ECB's exit strategy from fiscal stimulus measures.
Many say suggestions of any departure from quantitative easing
would be positive for the euro.
In general, QE undermines a currency's value as it expands
money supply and could potentially cause inflation.
Investors will also be watching for statements on the euro's
recent strength against the dollar, which has taken a broad hit
for much of the year on the view that U.S. rates will stay low
as those of other countries rise.
At past news conferences, Trichet has backed the official
U.S. position in favour of a strong dollar.
"We could see an erratic move if Trichet says something
about a strong euro, but that's not likely to happen," said Carl
Hammer, currency strategist at SEB in Stockholm.
"Overall, it's likely there won't be anything from the ECB
which will be euro negative," he said.
By 1040 GMT, the euro <EUR=> was up half of a percent at
$1.5125, near the day's high around $1.5130.
Some analysts said hawkish statements from Trichet may
prompt a test of a 16-month high of $1.5145 hit last week on the
view the ECB may raise rates before the Federal Reserve,
widening the euro's rate advantage against the dollar.
But others said the euro may face risks in the longer term
if the ECB raises rates too soon.
"While those chasing carry might buy EUR on the prospect of
higher rates, others will likely sell it for fear that the ECB
might choke off the recovery with a premature tightening,"
analysts at Calyon said in a note.
YEN STRUGGLES
The dollar index <.DXY>, which measures the greenback's
performance against a currency basket, was down 0.3 percent.
Despite its losses against most currencies, the dollar
<JPY=> rose 0.4 percent against the yen to 87.80 yen.
The dollar pulled further away from a 14-year low of 84.82
yen as news Japan's top Finance Ministry official for currencies
met U.S. Treasury officials this week ratcheted up speculation
Japan may act to slow the yen's appreciation.
The Bank of Japan signalled on Wednesday it was open to more
economic stimulus measures, including QE, after its emergency
meeting the previous day offered short-term funding, which
disappointed markets expecting more measures. [].
A rise in European shares <> and oil prices <CLc1>
boosted demand for risk, while gold <XAU=> hit a record high for
the third straight session.
This helped to boost higher-yielding, commodity-based
currencies including the Australian <AUD=D4> and New Zealand
dollars <NZD=D4>, which each 0.5 percent on the day.
Risk demand also rose on expectations that BofA <BAC.N> will
repay the $45 billion it received under the Troubled Asset
Relief Program over the next few days. []
This increased optimism more U.S. banks will soon pay back
government bailout money, indicating the banking sector is
stabilising after the financial crisis escalated last autumn.
(Editing by Nigel Stephenson)
((naomi.tajitsu@reuters.com; +44 207 542 5830; Reuters
Messaging: naomi.tajitsu.reuters.com@reuters.net))
